At their meeting last month, Federal Reserve officials were concerned that consumers were increasingly anticipating higher inflation, and they signaled that much higher interest rates might be needed for the contain.
Policy makers have also recognized, in report of their meeting of June 14 and 15 released on Wednesday that their rate hikes could weaken the economy. But they suggested such moves were needed to slow price increases to the Fed’s 2% annual target.
Officials agreed that the central bank should raise its benchmark interest rate to “restrictive” levels that would slow the growth of the economy and “recognized that an even more restrictive stance may be appropriate” if inflation persisted. After last month’s meeting, the Fed raised its key rate by three-quarters of a point to a range of 1.5% to 1.75% – the biggest increase in nearly three decades – and signaled that further hikes significant ones would probably be needed.
The Fed stepped up its efforts to tighten credit and slow growth as inflation hit a four-decade high of 8.6%, spreading to other sectors of the economy. Americans are also starting to expect high inflation to last longer than before — a sentiment that could embed inflationary psychology and make it harder to slow price increases.
And as the midterm elections approach, high inflation has risen to the top of Americans’ minds, posing a threat to President Biden and Democrats in Congress.
At a press conference after last month’s Fed meeting, Chairman Jerome Powell suggested that a half- or three-quarter-point rate hike was likely at the next meeting of policymakers at the Fed. end of this month. Minutes released on Wednesday confirmed that other officials had agreed such an increase would be “likely appropriate”. A rate hike of either size would top the quarter-point hike the Fed has typically made.
Last month, the Fed released projections that showed officials expected to raise its benchmark rate to 3.4% by the end of this year. At this level, the Fed’s key rate would no longer stimulate growth and could weaken the economy. The minutes suggest that policymakers could potentially raise rates above that level.
At last month’s meeting, policymakers said the economy appeared to be expanding in the April-June quarter, with consumer spending “remaining strong.” Since then, however, the economy has shown signs of slowing, with consumer spending falling in May, after adjusting for inflation, for the first time this year. Home sales tumble as mortgage rates jumped, accelerated by Fed rate hikes.
Signs of economic sluggishness have intensified fears that high prices and rising rates could push the economy into a recession late this year or next. Such worry has further complicated policymaking for the Fed, as a recession would normally lead it to cut rates to boost growth.
The Fed was expected to hike rates by half a point at last month’s meeting, but ended up announcing a three-quarter point hike instead. In his ensuing press conference, Powell mentioned recent economic reports that had heightened concerns about high inflation. Those reports included inflation data for the month of May, which showed the pace of price increases hit a 40-year high.
Powell also cited a consumer sentiment survey conducted by the University of Michigan which said consumers’ long-term inflation expectations were starting to rise faster. That puzzled Powell and other Fed officials because if people expect higher inflation, that sentiment can lead to price acceleration. Workers could, for example, demand higher wages to cover their expectations of increased bills and expenses, which would cause companies, in turn, to raise prices further to offset their labor costs. higher.
The Fed is trying to convince the public that it will be able to rise to the challenge and control the pace of price increases, in order to contain Americans’ inflation expectations.
There is “significant risk to which [Fed] that high inflation could take root if the public began to question Fed officials’ “determination” to fight rising prices, the minutes said.
As a result, according to the minutes, a credit crunch and “clear and effective communications” are key to controlling inflation.