WASHINGTON ( Associated Press) — Federal Reserve officials worried at their meeting last month that consumers were expecting increasingly high inflation, and indicated that much higher interest rates may be needed to control it.
Policymakers, in the minutes of their June 14-15 meeting released on Wednesday, also acknowledged that their rate hike could weaken the economy. But he suggested such moves were necessary to slow price growth on the Fed’s 2 percent annual target.
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Officials agreed that the central bank needs to raise its benchmark interest rate to “restrictive” levels that will slow the economy’s growth and “believe that an even more restrictive stance may be appropriate if inflation continues.” Is”. Following last month’s meeting, the Fed raised its key rate by more than three-quarters to 1.5 percent to 1.75 percent — the biggest single increase in nearly three decades — and signaled further major hikes would be needed.
The Fed is ramping up its campaign to strengthen credit and slow growth, with inflation reaching a four-decade high of 8.6 percent spreading to more sectors of the economy. Americans are also expecting higher inflation to last longer than previously thought – a sentiment that could embed inflationary psychology and make it harder to slow price growth.
And with the midterm elections approaching, high inflation has risen on top of Americans’ concerns, threatening President Joe Biden and Democrats in Congress.
At a news conference after last month’s Fed meeting, Chairman Jerome Powell suggested that a rate hike of either one-half or three-quarters was likely when the next meeting of policymakers takes place later this month. Minutes released on Wednesday confirmed that other officials agreed that such an increase is “likely to be justified.” Rate hikes of any size would be higher than the quarter-point hikes the Fed has typically made.
Last month, the Fed released estimates that showed officials expected to raise its benchmark rate to 3.4 percent by the end of this year. At that level, the Fed’s key rate will no longer stimulate growth and could weaken the economy. The minutes suggest that policymakers could potentially raise rates above that level.
At the time of last month’s meeting, policymakers said the economy appeared to be expanding in the April-June quarter, with consumer spending “remaining strong.” Since then, however, the economy has shown signs of slowing after adjusting for inflation for the first time this year, with consumer spending declining in May. Home sales are falling as mortgage rates have risen, accelerated by the Fed’s rate hikes.
Signs of an economic slowdown have raised fears that higher prices and rising rates could lead to a slowdown in the economy later this year or next year. Such concerns further complicate the Fed’s policymaking because a recession would normally prompt it to cut rates to stimulate growth.
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The Fed had expected a half-point increase in rates at last month’s meeting, but instead announced a three-quarter point increase. Later in his press conference, Powell referred to recent economic reports that had raised concerns about high inflation. Those reports included inflation data for May, which shows the pace of price rise has hit a 40-year high.
Powell also cited a survey of consumer sentiment conducted by the University of Michigan which noted that consumers’ long-term inflation expectations were beginning to rise more quickly. That made Powell and other Fed officials nervous, because if people expect higher inflation, that sentiment could drive prices up. For example, workers may demand higher wages to meet their expectations of rising bills and expenses, leading companies, in turn, to further raise prices to offset their higher labor costs.
The Fed is trying to convince the public that it will rise to the challenge and control the pace of price increases, aiming to keep Americans’ inflation expectations under control.
“There is a significant risk now facing (the Fed) that increased inflation could escalate if the public begins to question the resolution,” the minutes said.
As a result, the minutes said, tighter credit and “clear and effective communication” are key to controlling inflation.