WASHINGTON—Federal Reserve officials agreed at their meeting last month they would have to raise interest rates faster and to levels high enough to slow economic growth because of the worsening inflation picture.
Officials voted to raise their benchmark rate by 0.75 percentage point in June, the largest increase since 1994, and several officials have indicated since then that they are prepared to support another such increase at their meeting later this month.
Officials last month agreed they needed to raise rates to a so-called restrictive stance, high enough to slow growth, and that this would position them to lift rates to still-higher levels if inflation didn’t abate, according to minutes from the Fed’s June 14-15 meeting, released Wednesday.
“They recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes said.
The overall tone of the minutes suggest “the Fed upgraded the inflation problem to a five-alarm fire,” said Omair Sharif, an economist and head of the advisory firm Inflation Insights LLC.
As a result, the minutes also revealed officials’ growing acceptance that fighting inflation might lead to higher risks of a recession, but they saw that as “a cost they’re willing to pay,” said
chief U.S. economist at JPMorgan Chase.
Since last month’s meeting several Fed bank presidents and governors have endorsed a 0.75-point rate rise this month. “We’re not getting traction on inflation in a way that I had hoped,” said San Francisco Fed President
in comments to reporters on June 24 explaining her support for the larger rate rise.
Stocks staged a rally after the release of the minutes, with the Dow Jones Industrial Average closing up 0.2% at 31037.68. Bond prices fell, sending up yields on the 10-year Treasury note, which closed at 2.911%, up from 2.808%% on Tuesday.
The minutes showed an unusual level of agreement among the 18 officials who participate in the policy-setting meetings: All but one supported the 0.75-point increase.
Consumer prices rose 6.3% in May from a year earlier, according to the Fed’s preferred gauge, 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, has been running higher, climbing 8.6% in May—a new 40-year high.
Recent data releases have pointed to slower consumer spending and economic growth, particularly in white-hot sectors of the economy that boomed last year such as housing. Commodity and energy prices also have declined since last month’s meeting, along with market-based measures of future inflation.
The minutes indicated officials believed their own communications about a rapid series of rate increases had been responsible for the type of tightening in financial conditions, including higher borrowing costs for households and businesses, that they believe is necessary to damp investment and slow the broader economy.
Some economists have raised concerns that the central bank’s rate-setting committee may be correcting for perceived mistakes last year in waiting too long to raise rates by moving too rapidly in the other direction now.
“We appreciate that the committee felt it had to be seen to be taking control of the narrative last month, and they wanted to send a clear signal that they will not accommodate permanently higher inflation, but that job is done, and they don’t need to do it again,” said
chief economist at Pantheon Macroeconomics, who forecasts a steady deceleration in price pressures over the next year.
Recent data have suggested consumer spending could be shifting away from goods, which saw extreme price increases last year, and towards services. Many economists and central bankers have hoped this transition would ease overall price pressures. But some Fed officials last month saw signs that it might instead prompt those pressures to intensify in the services sector, providing less inflation relief.
More broadly, officials last month saw risks that inflation would stay higher for longer than they had previously anticipated. The minutes revealed growing unease among policy makers that the recent period of high inflation could change consumer psychology in ways that sustain high inflation. Economists believe expectations of future inflation can be self-fulfilling, which means the Fed could be required to lift rates to levels that push even harder on the monetary brakes if those expectations rise.
“Many participants judged that a significant risk now facing the committee was that elevated inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted,” the minutes said.
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Officials last month saw signs that consumers’ and businesses’ longer-term expectations “could be beginning to drift up to levels inconsistent with” the Fed’s 2% inflation goal, the minutes said.
Last month’s rate increase lifted the Fed’s benchmark federal-funds rate to a range between 1.5% and 1.75%. All the officials at the meeting projected the rate would need to rise at least to 3% this year, and most expected rates would need to rise to between 3.5% and 4.5% next year.
The minutes provided little detail around what might prompt the central bank to slow down its current pace of rate increases except to note that by raising rates faster now, officials might have more flexibility later. That language fanned hopes on Wall Street that the central bank would slow or even pause rate increases later this year.
The rate increase the Fed announced on June 15 marked an abrupt change from unusually precise guidance delivered in the run-up to that meeting by most officials, who had indicated they favored a smaller, half-point rise.
The minutes indicated that a higher-than-anticipated inflation report days before the meeting, the May consumer-price index, changed the inflation outlook more broadly. According to the minutes, the report “indicated that inflation pressures had yet to show signs of abating,” and several officials “saw it as solidifying the view that inflation would be more persistent than they had previously anticipated.”
Markets have been more volatile amid uncertainty over inflation and the Fed’s response. Average rates on the 30-year fixed mortgage, which jumped to around 6% after the Fed’s June meeting, have since declined, to 5.74% last week, according to the Mortgage Bankers Association.
Expectations of a 0.75-point rate increase and a higher path of rate rise in the days leading up to the Fed’s meeting last month generated the largest five-day increase in the two-year Treasury yield since 1982. By Tuesday, yields had reversed much of that entire rise.
Investors in interest-rate futures markets have begun speculating that the Fed would shift to a series of rate cuts next year.
“I could see the growth side of the equation warranting that move, but I don’t know to what extent the inflation numbers are going to cooperate and come down fast enough” to compel such a reaction, said Karim Basta, chief economist at III Capital Management in Boca Raton, Fla.
Fed economists at the June meeting indicated that labor market momentum had slowed, and some policy makers reported that business contacts also indicated that wage pressures had receded. A report from the Labor Department on Wednesday showed that U.S. job openings fell in May from extremely high levels, fewer people quit, and layoffs rose.
Write to Nick Timiraos at [email protected]
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