Inflation fears led to a larger Fed rate hike in June

WASHINGTON – Federal Reserve officials agreed at their meeting last month that they should raise interest rates faster and to levels high enough to slow economic growth due to the coronavirus pandemic. The rising inflation picture.

Officials voted To raise the benchmark interest rate by 0.75 percentage points In June, a half-point increase more than their move in May and the largest increase since 1994. Officials expected they would raise interest rates by either half a percentage point or 0.75 point at their meeting later this month, according to the minutes of the Federal Reserve’s June meeting. 14-15 meeting, released Wednesday.

The Fed’s main tool for managing the economy is changing the federal funds rate, which can affect not only borrowing costs for consumers but also shape broader decisions by businesses such as how many people to hire. The Wall Street Journal explains how the Fed is manipulating this one rate to steer the entire economy. Illustration: Jacob Reynolds

Officials agreed last month that rates should be raised to a so-called restrictive position, high enough to slow growth, and that this would put them in a position to raise rates to even higher levels. If inflation does not subside. “They recognized the possibility that a more restrictive stance would be appropriate if high inflation pressures persisted,” the minutes said.

Umair Sharif, Economist and Head of Consulting Firm, Inflation Insights LLC, said:

As a result, the minutes also revealed officials’ growing acceptance that fighting inflation could raise the risks of a recession, but that they saw it as “a cost they are willing to pay,” said Michael Feroli, chief US economist at JPMorgan Chase. .

Shares saw a rally after the minutes were released, with the Dow Jones Industrial Average closing 0.2% higher at 31,037.68. Bond prices fell, sending 10-year Treasury yields higher, which closed at 2.911%, up from 2.808%% on Tuesday.

The minutes showed an unusual level of agreement among the 18 officials who participated in policy-making meetings: all but one backed the 0.75-point increase.

Since the June meeting, several Fed chiefs and governors have approved another 0.75 point rate increase this month. “We’re not getting momentum on inflation the way I’d hoped,” San Francisco Fed President Mary Daly told reporters on June 24, explaining. Its support for a higher rate is greater.

Consumer prices It rose 6.3% in May from the previous year, according to the Federal Reserve’s preferred metric, the personal consumption expenditures price index. Core prices, which exclude volatile food and energy categories, rose 4.7% in May. A separate measure, the consumer price index, was rising, Up 8.6% in May—A new high in 40 years.

Recent data data pointed to a slowdown in consumer spending and economic growth, particularly in the hot economic sectors that boomed last year such as housing. Commodity and energy prices have also fallen since last month’s meeting, along with market gauges of future inflation.

The minutes noted that officials believed their communications about a rapid series of price increases were responsible for the type of tightening in financial conditions, including higher borrowing costs for households and businesses, which they believe are necessary to discourage investment and slow the broader economy.

Some economists have raised concerns that the central bank’s rate-setting committee may correct the perceived mistakes last year of waiting too long for a rate hike by moving too quickly in the other direction now.

“We appreciate that the committee felt it should be seen as dominating the narrative last month, and wanted to send a clear signal that they were not going to absorb permanently higher inflation, but that job was done, and they didn’t,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. which predicted a steady slowdown in price pressures over the next year.”

Recent data has indicated that consumer spending may shift away from goods, which saw huge price increases last year, and toward services. Many economists and central bankers hope this shift will ease overall price pressures. But some Federal Reserve officials last month saw signs that it might instead drive those pressures to ramp up in the services sector, providing less inflationary relief.

More broadly, officials last month saw risks that inflation would remain higher for longer than they had previously expected. The minutes revealed a growing concern among policy makers that the recent period of high inflation could change consumer psychology in ways that maintain high inflation. Economists believe future inflation forecasts It could be self-fulfilling, which means the Fed could be asked to raise interest rates to levels that push more aggressively on the monetary brake if those expectations rise.

“Many participants considered that the significant risk now facing the committee is that high inflation could take hold if the public begins to question the committee’s determination to adjust the policy stance as required,” the minutes said.

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Officials last month saw signs that long-term consumer and business expectations “could begin to drift to levels inconsistent with” the Fed’s 2% inflation target, the minutes said.

Last month’s rate hike raised the Fed’s Federal Funds rate to a range of between 1.5% and 1.75%. All officials at the meeting predicted that the rate would need to rise at least to 3% this year, and most projected rates would need to rise to between 3.5% and 4.5% next year.

The minutes provided few details about what might prompt the central bank to slow its current pace of rate hikes except to note that by raising rates faster now, officials may have more flexibility later. That language fueled hopes on Wall Street that the central bank will slow or even halt interest rate increases later this year.

The Fed’s June 15 rate hike was a sudden change from the unusually precise guidance delivered in the run-up to that meeting by most officials, who indicated they favored a smaller half-point hike.

The minutes noted that a higher-than-expected inflation report days before the meeting, the May consumer price index, had shifted inflation expectations on a larger scale. According to the minutes, the report “indicated that inflation pressures have not yet shown signs of abating,” and many officials saw that this reinforces the view that inflation will be more stable than they previously expected.

Markets were more volatile amid uncertainty over inflation and the Fed’s response. Average interest rates on a 30-year fixed-rate mortgage, which jumped to about 6% after the Federal Reserve’s June meeting, have since fallen to 5.74% last week, according to the Mortgage Bankers Association.

Expectations of a 0.75 point rate hike and the higher trajectory of a rate hike in the days leading up to last month’s Federal Reserve meeting led to the largest five-day increase in the two-year Treasury yield since 1982. By Tuesday, yields had reversed much of that entire rally. .

Investors in the interest rate futures markets have begun to speculate that the Fed will turn to a series of interest rate cuts next year.

said Karim Basta, chief economist at III Capital Management in Boca Raton, Florida.

Economists at the Federal Reserve at the June meeting indicated that labor market momentum has slowed, and some policymakers reported that business communications also indicated an easing of wage pressures. A report from the Ministry of Labor on Wednesday showed that US job opportunities fell in May From extremely high levels, fewer people quit, and layoffs rose.

write to Nick Timiraos at [email protected]

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