Federal Reserve officials expressed concern at last month's meeting that consumers were anticipating higher inflation and indicated that higher interest rates might be necessary to limit price rises.
According to minutes of their June 14-15 meeting, released Wednesday, the policymakers acknowledged that rate hikes could hurt the economy. They suggested that these steps were necessary in order to slow down price increases to the Fed's 2% annual goal.
Officials agreed that the central bank should raise its benchmark rate to "restrictive" levels to slow down the economy's growth. If inflation persists, "an even more restrictive approach could be appropriate."
The Fed raised its key interest rate by three quarters of an inch to 1.5% to 1.75% after last month's meeting. This is the largest single increase in almost three decades. It also signaled that large increases would likely be necessary.
As inflation rises to 8.6%, the Fed has intensified its efforts to reduce credit and slow growth. This is despite having been in place for four decades. Americans have begun to expect that high inflation will last longer than before. This could create an inflationary mindset and make it more difficult to slow price rises.
With midterm elections fast approaching, high inflation has risen to the top of Americans’ concerns, posing an immediate threat to President Joe Biden as well as Democrats in Congress.
Jerome Powell, the Fed Chair, suggested that a rate increase of one-half to three-quarters of an inch was possible when policymakers meet later this month. Other officials confirmed Wednesday that a rate increase was "likely" appropriate, according to the minutes. A rate increase of any size would be more than the Fed's usual quarter-point increment.
The Fed published projections last month showing that they expect to increase their benchmark rate by 3.4% by the end this year. The Fed's key rate at that level would not stimulate growth and could make it more difficult to hire and purchase. According to minutes, the Fed could raise rates by as much as 3.4%.
The policymakers stated that the economy was expanding in the April-June quarter and that consumer spending was "remaining strong" at the last month's meeting. However, the economy has shown signs of slowing since then. Consumer spending fell in May after being adjusted for inflation for the first year. As mortgage rates rise, the Fed's rate hikes have accelerated home sales.
Economists claim that the Fed's economic assessment was outdated as of last month. Wage gains are slowing, oil prices are dropping, and commodities like wheat and wheat are experiencing a decline in value. These trends could indicate that Fed policymakers who have stated they would be "nimble" when responding to economic data won't raise rates as quickly as financial markets anticipate.
"We hope that the sobering information from the June meeting will push member towards the smaller increase," Ian Shepherdson, chief economic economist at Pantheon Macroeconomics. They wanted to signal their inability to accommodate higher inflation permanently, but they have succeeded.
Although the Fed was expected to raise rates by half-point at its last meeting, it ended up announcing an increase of three quarters of a point instead. Powell spoke out about recent economic reports raising concerns about high inflation at his news conference. Inflation data for May showed that prices rose at a 40-year high.
The Fed minutes were published and stocks rose, which indicates that investors have reasonable confidence in the central bank's ability to control inflation.
Economic slowdown has heightened fears that rising rates and high prices could lead to a recession later this year or next. This has complicated Fed policymaking as a recession would normally prompt it to reduce rates to stimulate growth.
Gus Faucher (chief economist at PNC), stated in a research paper that "Given how difficult the FOMC's task is ahead, the risk for recession is elevated." The margin of error for the committee is very small, even if they can slow down economic growth enough to bring down the inflation rate without causing a recession.
Powell also mentioned a University of Michigan survey of consumer sentiment that indicated that longer-term inflation expectations are starting to rise faster. Powell and Fed officials were unnerved by this because people who expect higher inflation can cause an acceleration in prices.
For example, consumers could try to buy high-end items now rather than waiting for them to become more expensive. This could result in increased demand and a shortage of products, which would allow companies to increase prices further, prompting consumers to purchase even faster.
With the aim of reducing inflation expectations, the Fed wants to convince Americans that it is up to the task and will manage price rises at a reasonable pace.
Minutes stated that there is a "significant risk" facing the Fed now that high inflation could become entrenched if people began to question the determination of Fed officials to fight higher prices.
Accordingly, minutes stated that tighter credit and more effective communication are crucial to controlling inflation.
Irina Ivanova, CBS News reporter, contributed reporting.
