Top 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 exceeds their expectations, according to an account of their most recent meeting.
minutes of Meeting in JuneIt was the Fed’s first 0.75 percentage point rate hike since 1994, and policymakers now support raising interest rates to the point where economic activity is restrained, which could become “more restrained” if the data warrants. .
“A significant risk facing the multi-participant group now is that if the public begins to question the group’s determination to change the policy stance to assurances, higher inflation may persist,” the minutes said.
Federal Open Market Committee minutes released Wednesday showed alarm spreading through the top ranks of the U.S. central bank. inflammation, which is running at an annualized pace of 8.6 percent. The account also showed the lengths to which authorities are willing to go to ensure prices do not spiral further out of control.
The central bank will decide whether to raise rates by 0.50 percentage points or 0.75 percentage points at its meeting this month. indicated Their support for the big increase.
“If inflation takes hold in the minds of consumers and businesses, it will be very difficult to reduce it in the medium term,” said Cathy Postjanczyk, chief US economist at Oxford Economics. “That was the breaking point [the Fed]They want to do everything they can to prevent that from happening.
He added: “The higher the long-term inflation, the more it will be embedded in expectations.”
The minutes show that participants are increasingly aware that their plans to tighten fiscal policy will slow economic growth. Most noted that the outlook’s risks are “leaning down,” and tightening is likely to weigh more heavily on activity.
The minutes echoed recent comments by Fed Chairman Jay Powell, who insisted there was little room for maneuver as the central bank tries to contain inflation without causing widespread job losses.
“The US recession is now.”Certainly a possibility”, and will largely depend on factors outside the central bank’s control, he said last month, pointing to the war in Ukraine and prolonged Covid lockdowns in China.
Powell doubled down on that message at a meeting with other central bankers last week, warning that failure to restore price stability could lead to even worse consequences. American economy.
“The process will involve some pain, but the worst pain is failing to address this high inflation and allowing it to persist,” he said.
An account of the June meeting sheds more light on why the Fed End suddenly Dramatically, it wants to step back from its previously signaled plans for a second 0.50 percentage point rate hike to increase the pace of tightening monetary policy.
Instead, the 0.75 percentage point increase lifted the federal funds rate to a new target range of 1.50 percent and 1.75 percent.
The decision followed the release of two economic reports, one showing a big rise in consumer prices in May and the other a rise in inflation expectations.
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Participants noted that the previous report indicated that inflationary pressures had not yet abated and that more “[solidified] The view that inflation will be more persistent than they previously expected”, according to the minutes.
The June meeting also featured revised forecasts, which see officials expect rates to rise below 3.5 percent by the end of the year. Further rate hikes are expected to push the policy rate to 3.75 percent before the next cut in 2024. Officials penciled in high unemployment and low growth during that period.
The minutes described why the central bank scrapped a key line in its policy statement last month, in which it said inflation would ease back toward its 2 percent target and that the labor market would “remain strong” as monetary policy tightens.
“Members agreed to remove the previous statement language because further firmness in the policy stance would cause some slowdown in economic growth and moderation in labor market conditions,” the minutes said.
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