7th July 2022 – (Washington) U.S. Federal Reserve officials believed that an increase of 50 or 75 basis points would likely be appropriate at the next meeting, recognising the possibility of an even more restrictive stance, according to the minutes of the Fed’s latest policy meeting released Wednesday.
“Participants noted that inflation remained much too high and observed that it continued to run well above the committee’s longer-run 2 percent objective,” showed the minutes of the Federal Open Market Committee’s (FOMC) June 14-15 meeting.
Total personal consumption expenditures (PCE) prices – the Fed’s preferred measure of inflation – had risen 6.3 percent over the 12 months ending in April, while the 12-month change in the Consumer Price Index (CPI) in May “came in above expectations,” the minutes noted.
The CPI skyrocketed 8.6 percent in May from a year earlier, marking the third straight month of inflation over 8 percent and hitting a new four-decade high, promoting Fed officials to make a last-minute change at the June meeting after signaling a 50-basis-point rate hike for weeks.
The central bank raised its benchmark interest rate by 75 basis points in June, marking the sharpest rate hike since 1994, and taking the level of the federal funds rate to a range of 1.5 to 1.75 percent.
“Participants were concerned that the May CPI release indicated that inflation pressures had yet to show signs of abating, and a number of them saw it as solidifying the view that inflation would be more persistent than they had previously anticipated,” the minutes said.
Participants observed that some measures of inflation expectations had moved up recently, the minutes added.
“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.
The minutes showed that participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting, leaving the door open for another 75-basis-point rate hike.
At a press conference after the June meeting, Fed Chair Jerome Powell noted that the 75 basis point increase was an unusually large one, and “I do not expect moves of this size to be common.” A 75 basis-point rise triples the usual move.
The committee would like to do a little more “front-end loading,” meaning the Fed would implement larger hikes early in its rate hiking cycle, said Powell.
The Fed’s latest quarterly economic projections showed that Fed officials’ median projection of PCE inflation is 5.2 percent in the fourth quarter of this year, up from 4.3 percent in the March projection. Median projection of PCE inflation falls to 2.6 percent by 2023, and to 2.2 percent by 2024.
The economic projections also showed that the median FOMC projection for the federal funds rate at the end of this year has jumped to 3.4 percent, much higher than the 1.9 percent projected in March. The median projection for 2023 year-end federal funds rate is 3.8 percent.
“Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes noted.
According to the minutes, a couple of Fed officials noted that the gross domestic product (GDP) and gross domestic income had been giving “conflicting signals” recently regarding the pace of economic growth, making it challenging to determine the economy’s underlying momentum.
“Most participants assessed that the risks to the outlook for economic growth were skewed to the downside,” the minutes said.
Officials acknowledged that the Fed’s monetary policy tightening would likely slow down economic growth and push up unemployment, the minutes noted.
“As the further firming in the policy stance would likely result in some slowing in economic growth and tempering in labor market conditions, members also agreed to remove the previous statement language that had indicated an expectation that appropriate policy would result in a return of inflation to 2 percent and a strong labor market,” the minutes said.
A recession is “inevitable” within the next 12 to 18 months, former President of the Federal Reserve Bank of New York Bill Dudley wrote in a recent Bloomberg opinion piece.
But a recession may come sooner. According to the Atlanta Federal Reserve’s GDPNow model updated last week, the U.S. GDP is estimated to contract at a seasonally adjusted annual rate of 2.1 percent in the second quarter. With a first-quarter contraction, a second consecutive quarter of negative growth would meet the definition of a recession.