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“Tighter” policy likely if inflation does not decline

Federal Reserve officials in June stressed the need to fight inflation even if that meant slowing an economy that already appears to be on the verge of recession, according to meeting minutes released Wednesday.

Members said the July meeting would also likely see another 50 or 75 basis point move on top of a 75 basis point increase approved in June. A basis point is one hundredth of 1 percentage point.

“In discussing potential policy actions at upcoming meetings, participants continued to anticipate that continued increases to the target range of the federal funds rate would be appropriate to achieve the Committee’s objectives,” the minutes read. “In particular, participants felt that an increase of 50 or 75 basis points would probably be appropriate at the next meeting.”

Raising benchmark borrowing rates by three-quarters of a percentage point in June was needed to control increases in the cost of living to their highest level since 1981, central bankers said. They said they would continue to do so until inflation approached their long-term target of 2%.

“Participants agreed that the economic outlook warranted a shift to a restrictive policy stance, and they recognized the possibility that an even more restrictive stance may be appropriate should elevated inflationary pressures persist,” the document said.

They acknowledged that the policy tightening would likely come at a price.

“Participants recognized that the policy tightening could slow the pace of economic growth for some time, but they saw the return of inflation to 2% as essential to achieving maximum employment on a sustainable basis,” indicates the summary of the meeting.

The decision to raise rates by 75 basis points followed an unusual sequence in which policymakers appeared to change their minds at the last minute after saying for weeks that a 50 basis point move was all but certain.

Following data showing consumer prices at 8.6% year over year and rising inflation expectations, the Federal Open Market Committee charged with setting rates chose the tougher route.

The Fed’s resolve

At the June 14-15 meeting, officials noted they needed to act to assure markets and the public that they were serious about fighting inflation.

“Many participants felt that a significant risk the Committee now faced was that high inflation could take hold if the public began to question the Committee’s resolve to adjust policy direction as it shall,” the minutes read.

The document adds that these measures, combined with a communication regarding the direction of the policy, “would be essential to restore price stability”.

However, the approach comes with the US economy on shaky ground.

Gross domestic product in the first quarter fell 1.6% and is expected to fall 2.1% in the second quarter, according to an Atlanta Fed data tracker. This would put the economy in a technical recession, although historically shallow.

“Since the last meeting, economic conditions have weakened as financial conditions have tightened. What markets want to hear now is what the Fed has in mind if economic data releases continue to rise. signal a deeper and more severe slowdown without a commensurate slowdown in inflation,” said Quincy Krosby, chief equity strategist at LPL Financial.

At the meeting, Fed officials expressed optimism about the longer-term trajectory of the economy, although they cut GDP forecast sharply, to 1.7% in 2022, from an estimate previous 2.8% in March.
They noted some reports of slowing consumer sales and companies holding back investment due to rising costs. The war in Ukraine, continued supply chain bottlenecks and Covid lockdowns in China were also cited as concerns.

Officials have projected a much bigger surge in inflation than before, now expecting prices for overall personal consumption expenditure to jump 5.2% this year, down from 4.3% previously estimated. PCE 12-month inflation was 6.3% in May.

The minutes noted that risks to the outlook were lower for GDP and higher for inflation, as tighter policy could slow growth. The committee gave priority to the fight against inflation.

Officials noted that the policy measures, which put the Fed’s benchmark funds rate in a range of 1.5% to 1.75%, have already yielded results, tightening financial conditions and lowering some stimulus measures. market-based inflation.

Two of those measures, which compare inflation-linked government bonds to Treasuries, hit their lowest levels since the fall of 2021.

The minutes noted that after a series of rate hikes, the Fed would be well placed to gauge the success of the moves before deciding whether or not to continue. They said a “tighter policy” could be implemented if inflation failed to come down.

Officials indicated a series of increases that would take the funds rate to 3.4% this year, above the longer-term neutral rate of 2.5%. Futures markets are pricing in the possibility that the Fed will have to start cutting rates as early as the summer of 2023.

“Tighter” policy likely if inflation does not decline

Source link “Tighter” policy likely if inflation does not decline

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