According to meeting minutes released on Wednesday, Federal Reserve officials emphasized the need to fight inflation even if it meant slowing an already-appearing-to-be-in-recession economy.
Members predicted that in addition to the 75 basis point increase approved in June, there would likely be another 50 or 75 basis point move at the July meeting. One hundredth of a percentage point is referred to as a basis point.
The minutes stated that participants “continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives in discussing potential policy actions at forthcoming meetings.” Participants felt that, in particular, an increase of 50 or 75 basis points would probably be appropriate at the following meeting.
It was necessary to control cost-of-living increases running at their highest levels since 1981, according to central bankers, to increase benchmark borrowing rates by three-quarters of a percentage point in June. They stated that they would keep doing this until inflation reached their long-term objective of 2 percent.
Participants agreed that the economic outlook called for a more restrictive stance of policy, and they acknowledged that if elevated inflation pressures persisted, a still more restrictive stance might be necessary.
They acknowledged that the tightening of the policy would probably cost something.
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According to the meeting summary, “Participants recognized that policy firming could temporarily slow the rate of economic growth, but they saw the return of inflation to 2 percent as critical to achieving maximum employment on a sustained basis.”
After an unusual sequence in which policymakers seemed to have a last-minute change of heart after saying for weeks that a 50 basis point move was almost certain, they decided to raise rates by 75 basis points.
The Federal Open Market Committee, which sets interest rates, decided to take a more restrictive stance in response to data showing that consumer prices are increasing at an annual rate of 8.6 percent and inflation expectations are rising.
Fed’s commitment
At the June 14–15 meeting, officials said they needed to act now to reassure the public and the markets that they are committed to fighting inflation.
The minutes stated that many participants believed that a significant risk currently facing the Committee was that elevated inflation could become entrenched if the public started to doubt the Committee’s resolve to adjust the stance of policy as warranted.
The actions, along with communication about the policy’s stance, “would be essential in restoring price stability,” the document continued.
However, the strategy comes at a time when the American economy is in peril.
According to an Atlanta Fed data tracker, the first quarter’s gross domestic product decreased by 1.6 percent and is projected to decrease by 2.1 percent in the second. That would technically place the economy in a historically brief recession.
“Economic conditions have deteriorated and financial conditions have tightened since the last meeting. If recent economic data releases continue to point to a deeper, more serious downturn without a corresponding easing in inflation, what markets want to know is what the Fed has in mind “said Quincy Krosby, LPL Financial’s chief equity strategist.
At the meeting, Fed officials were upbeat about the economy’s longer-term trajectory, despite sharply lowering their GDP projections from 2.8 percent in March to 1.7 percent in 2022.
They took note of some reports indicating sluggish consumer sales and businesses delaying investments because of rising costs. Concerns included the ongoing conflict in Ukraine, supply chain bottlenecks, and Covid lockdowns in China.
Compared to their previous estimate of 4.3 percent, officials now expect the headline personal consumption expenditures price increase to increase by 5.2 percent this year. In May, PCE 12-month inflation was 6.3%.
As tighter policy could slow growth, the minutes noted that risks to the outlook were skewed lower for GDP and higher for inflation. The committee gave fighting inflation top priority.
The Fed’s benchmark funds rate is now between 1.5 percent and 1.75 percent, according to officials, and these policy changes have already tightened financial conditions and decreased some market-based inflation measures.
Two such measures, which contrast Treasurys with inflation-indexed bonds, have dropped to their lowest points since the fall of 2021.
The minutes stated that following a number of rate increases, the Fed would be in a good position to assess the results of the changes before deciding whether to proceed. They stated that if inflation doesn’t go down, “more restrictive policy” may be put in place.
The funds rate would reach 3.4 percent this year, exceeding the longer-run neutral rate of 2.5 percent, according to officials who predicted a series of increases. The possibility that the Fed will have to start lowering rates as soon as the summer of 2023 is factored into futures markets.
