The Fed embraced a sharp rate hike amid fears of eroding inflation outlook, minutes show

WASHINGTON, July 6 (Reuters) – Deteriorating inflation and concern over waning confidence in the Federal Reserve’s power to improve it prompted U.S. central bank officials to rally to a disproportionate increase in interest rates and a firm reaffirmation of its intention to lower prices. control, showed the minutes of the political meeting of June 14 and 15.

Data released in the days leading up to that meeting showed consumer inflation in May accelerating to an annualized rate of 8.6%, defying Fed hopes that the pace of price increases peaked in the spring.

“Participants agreed … that the outlook for near-term inflation had deteriorated since the May meeting,” the minutes read, justifying the 0.75 percentage point rate hike last month and the move to a “restrictive” monetary policy.

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With families stressed by rising food and gas prices, and no evidence that Fed actions to date have begun to stop the fastest inflation spike in 40 years, “de many participants felt that a significant risk … was that high inflation might take hold if the public began to question the resolve of the (Federal Open Market) Committee to adjust the policy stance as it should be,” according to the minutes, which were released on Wednesday.

The result was the first 0.75 percentage point rate hike since 1994, and the promise of more to come, with participants judging that a 50 or 75 basis point hike would likely be appropriate at the next meeting. politics later this month.

The group, in a show of unanimity that erased the typical fault lines between inflation ‘hawks’ and ‘doves’, noted a willingness to move interest rates as high as needed to bring the inflation to the Fed’s 2% target, and a need to tell the public it was ready to do so.

“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 minutes read.

Since then, Fed Chairman Jerome Powell has amplified his own rhetoric, saying last week that there was a “clock ticking” on the Fed to show it could tame prices before public psychology does not start to get worse.

At the meeting, there were fears that changes were already underway, with “many participants” worried that “long-term inflation expectations were starting to drift”.

DOWNSIDE RISKS

The minutes did not mention recession risk and, in fact, Fed officials said they believed the data showed U.S. gross domestic product “growing in the current quarter,” with a still tight labor market.

But they acknowledged that the risks were on the downside, and in particular that Fed policy could have a bigger impact than expected.

Financial markets remained largely unchanged after the release of the minutes, which largely confirmed investors’ beliefs about the direction of monetary policy.

Investors are currently expecting the Fed to approve another 75 basis point rate hike at the next meeting on July 26-27 in what has become a rapid shift in monetary policy.

Less than a year ago, officials were still pledging to keep the monetary taps wide open, with the federal funds rate near zero and $120 billion in monthly money-generating bond purchases, until that there was “substantial further progress” in the labor market and inflation was “moderately on track” to exceed the Fed’s 2% target “for some time.”

Now officials are looking at a labor market seen as unsustainably tight – new data for May showed there were still nearly two jobs open for every unemployed person – with inflation at its highest level in 40 years and policymakers claiming to be willing to court a recession-wide economy in order to contain public expectations regarding inflation.

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Reporting by Howard Schneider; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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