Federal Reserve officials in June stressed the need to fight inflation, even if it meant slowing an economy already on the brink of recession, according to minutes released Wednesday.
Members said the July meeting would also likely see another 50 or 75 basis point move. A basis point is one-hundredth of 1 percentage point.
“In discussing potential policy actions at upcoming meetings, participants continued to anticipate that continued increases in the federal fund rate target range would be appropriate to achieve the Committee’s goals,” the minutes said. In particular, participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting.
By raising benchmark interest rates by three-quarters of a percentage point, central bankers said the move was necessary to contain the rise in the cost of living, which was at its highest level since 1981.
“Participants agreed that the economic outlook warranted a move to a restrictive policy stance, and they recognized the possibility that an even more restrictive stance could be appropriate if heightened inflationary pressures persist,” the document said.
They acknowledged that the policy tightening would likely come at a price.
“Participants recognized that policy tightening could slow the pace of economic growth for a while, but saw the return of inflation to 2 percent as critical to achieving maximum employment on a sustainable basis,” the meeting summary said.
The move to hike rates by 75 basis points followed an unusual last-minute order in which policymakers appeared to change their minds after saying for weeks that a 50 basis point move was almost certain.
After data showing consumer prices are at a 12-month rate of 8.6% and inflation expectations are rising, the rate-setting Federal Open Market Committee took the tougher path.
Officials at the June 14-15 meeting noted that they should take the step to reassure the markets and the public that they are taking inflation seriously.
“Many participants believed that a significant risk the committee now faces is that high inflation could become entrenched if the public begins to question the committee’s determination to adjust policy stance as necessary,” the statement said. minutes.
The document added that the steps, combined with communication on the policy stance, would be “essential to restore price stability”.
However, the approach comes with the US economy on shaky ground.
Gross domestic product fell 1.6% in the first quarter and is on track to fall 2.1% in the second quarter, according to a data tracker from the Atlanta Fed. That would send the economy into a technical, if historically superficial, recession.
Fed officials at the meeting expressed optimism about the long-term path of the economy, although they have slashed GDP forecasts to 1.7% in 2022, from a previous estimate of 2.8% in March.
They noted some reports of a slowdown in consumer sales and companies holding back investment due to rising costs. The war in Ukraine, ongoing supply chain bottlenecks and Covid lockdowns in China were also cited as concerns.
Officials expected a much larger rise in inflation than before, and are now anticipating a 5.2% rise in personal consumer spending prices this year, compared to the previous estimate of 4.3%. The PCE’s 12-month inflation rate was 6.3% in May.
The minutes noted that risks to the outlook were lower for GDP and higher for inflation, as tighter policies could slow growth. The committee gave priority to fighting inflation.
Officials noted that policy changes, which have pushed the Fed’s interest rates into a 1.5%-1.75% range, have already paid off, tightening financial conditions and lowering some market-based inflation measures.
Two such measures, which compare inflation-indexed government bonds to government bonds, have soared to their lowest levels since the fall of 2021.
The minutes noted that following a series of rate hikes, the Fed would be well positioned to evaluate the success of the measures before deciding whether to proceed. They said “more restrictive policies” could be introduced if inflation does not fall.
Officials pointed to a series of hikes that would push fund rates to 3.4% this year, above the longer-term neutral rate of 2.5%. Futures markets estimate the possibility that the Fed will have to start cutting rates as early as the summer of 2023.