US Fed: ‘More restrictive’ rates possible if inflation continues | Business and economic news

Policymakers supported a 50 or 75 basis point hike in interest rates at their next meeting in July, the minutes of the Fed’s June meeting show.

Federal Reserve officials agreed last month that interest rates may need to rise longer to prevent higher inflation from anchoring, even if it slowed the US economy.

Policymakers supported raising rates by 50 or 75 basis points at their next meeting in July, according to the minutes of the Federal Open Market Committee’s June 14-15 policy meeting released Wednesday in Washington. They considered it crucial to maintain the credibility of the central bank to keep inflation in check.

“Many participants believed that a significant risk the committee now faces was that increased inflation could become entrenched if the public questioned the committee’s determination to adjust policy stance as needed,” the statement said. minutes.

Officials also “recognized that policy tightening could slow the pace of economic growth for a while, but saw the return of inflation to 2% as crucial to achieving maximum employment on a sustainable basis.”

Aggressive pressure from the Fed to contain the highest inflation rate in 40 years has sent financial markets twitching as investors worry that tighter monetary policy will send the US economy into recession.

Officials raised interest rates 75 basis points in June, the highest since 1994, raising their benchmark to a target range of 1.5% to 1.75%, and Chairman Jerome Powell suggested doing the same in July.

He told reporters at a news conference after the meeting that a 75 basis point raise or a 50 basis point move would most likely still be on the table when policymakers meet from July 26 to 27.

Officials went big in June – despite previously saying they favored a 50 basis point increase – after inflation data picked up momentum and a key indicator pointed to expectations of future price pressures among US consumers could increase.

Kansas City Fed President Esther George, who disagreed with the hike in favor of a smaller hike, was the only one of 18 policymakers not to bounce back by 75 basis points in June, the minutes show.

Central bankers acknowledged in June “the possibility that an even more restrictive stance could be appropriate if elevated inflationary pressures persist,” the minutes said.

Policymakers noted that “if inflation expectations were not anchored, it would be more expensive to bring inflation back to the commission’s target.”

Several officials since that meeting have reiterated Powell’s characterization of the likely outcome of the July interest rate decision, even as fears of a recession mount.

The consumer spending price index, which the Fed uses for its inflation target, has risen 6.3% since May 2021 — more than three times the central bank’s 2% target.

Powell has said there are ways to lower inflation while keeping the labor market strong, but acknowledged that this will be a challenge.

Economists have revised growth forecasts down amid data pointing to weak consumer spending, tighter financial conditions and a slowdown in manufacturing activity in the US.

Mortgage rates, which have doubled since the start of the year, are also cooling the housing market and some companies are seeing lower demand.

According to Bloomberg Economics, the probability of a recession in the US in the coming year is now about one in three. A similar pessimism is evident in future interest rates markets: investors are betting the Fed will change course next year, halt rate hikes earlier than officials had predicted and begin cutting rates in mid-2023.

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