Senior Federal Reserve officials now see entrenched inflation as a “significant risk” to the U.S. economy and fear that even tighter monetary policy will be needed if price growth beats their expectations, according to a report from their latest meeting.
The protocol of Meeting in Junewhich saw the Fed achieve its first rate hike of 0.75 percentage points since 1994, also showed that policymakers now favor raising interest rates to the point where economic activity is limited, with the possibility of them becoming “more more restrictive’ if justified by the data.
“Many participants felt that a significant risk now facing the committee is that elevated inflation could take hold if the public begins to question the committee’s resolve to adjust the policy stance as warranted,” it said the protocol.
The minutes from the Federal Open Market Committee, which were released on Wednesday, showed that anxiety was spreading among the top ranks of the US central bank during inflation, which is moving at an annual rate of 8.6 percent. The bill also showed how far officials are willing to go to ensure prices don’t spiral further out of control.
The Fed will decide whether to raise interest rates by 0.50 percentage point or 0.75 percentage point at its meeting this month, although several officials are indicated their support for the larger increase.
“If inflation takes root in the psyche of consumers and businesses, it will be much more difficult to reduce it in the medium term,” said Kathy Bostiancic, chief US economist at Oxford Economics. “This is the tipping point for [the Fed]and they really want to do everything they can to make sure that doesn’t happen.”
She added: “The longer inflation stays high, the more it will build into expectations.”
The minutes showed that participants are increasingly aware that their plans to tighten monetary policy will slow the pace of economic growth. Most noted that risks to the outlook were “skewed to the downside,” given the possibility that further tightening could further weigh on activity.
The minutes echoed recent comments by Fed Chairman Jay Powell, who stressed that the central bank has little room to maneuver as it tries to tame inflation without causing massive job losses.
It is now a recession in the UScertainly a possibility,” and will largely depend on factors beyond the Fed’s control, he said last month, pointing to the war in Ukraine and China’s ongoing Covid lockdowns.
Powell doubled down on that message last week on a panel with other central bankers when he warned that failure to restore price stability would lead to an even worse outcome for US economy.
“The process is very likely to involve some pain, but the worst pain would be if we fail to deal with this high inflation and allow it to become permanent,” he said.
The report from the June meeting shed further light on why the Fed he suddenly decided to sharply accelerate the pace at which it is tightening monetary policy, deciding to scrap previously signaled plans for a second straight rate hike of 0.50 percentage points.
Instead, a 0.75 percentage point increase lifted the federal funds rate to a new target range of between 1.50% and 1.75%.
The decision followed the release of two economic reports, one showing a big jump in consumer prices in May and the other a rise in inflation expectations.
Participants expressed concern that the previous report suggested that inflationary pressures had not yet abated and “[solidified] the view that inflation will be more persistent than they had previously expected,” according to the minutes.
The June meeting also included revised forecasts that showed officials expected rates to rise to just below 3.5 percent by the end of the year. Further rate hikes, pushing the key rate to 3.75 percent, are expected next year, before cuts in 2024. Officials also noted higher unemployment and lower growth during that period.
The minutes describe why the Federal Reserve deleted a key line from its policy statement last month in which it said it expected inflation to fall back to its 2 percent target and the labor market to “remain strong” while tightening monetary policy.
“As further hardening of the policy stance is likely to result in some slowing of economic growth and softening of labor market conditions, members also agreed to remove previous language from the statement,” the minutes said.