WASHINGTON—Federal Reserve officials concluded at their meeting last month that they needed to pick up the pace of interest-rate increases because the inflation outlook had deteriorated and that, as a result, rates would need to rise to levels designed to deliberately slow economic growth .
Officials last month believed rates needed to rise to a restrictive stance and that such a monetary policy setting would better position the rate-setting committee to lift rates to higher levels if warranted. “They recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes said.
The rate increase they announced on June 15, the largest since 1994, 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 last-minute policy shift followed the release of a higher-than-anticipated inflation report, the May consumer price index, days before the policy meeting.
“The near-term inflation outlook had deteriorated since the time of the May meeting,” the minutes said. “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 meeting minutes showed an unusual level of agreement among the 18 officials who participate in the policy-setting meetings. Among 11 members who had a vote last month, Kansas City Fed President Esther George dissented in favor of a smaller half-point rate increase. The minutes indicated all other officials, including those without a vote, supported the 0.75-point increase.
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. Nearly all Fed officials who have spoken since the meeting have reported another 0.75-point rate increase is likely later this month.
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. The consumer-price index has been running higher, climbing 8.6% in May—a new 40-year high. Core prices were up 6% over the previous year.
The Fed’s staff raised slightly its projection for inflation over the second half of this year at last month’s meeting because of stronger than anticipated wage growth and the assessment that supply-and-demand imbalances would be more persistent than previously assumed.
The minutes revealed growing unease among policy makers that the recent interval 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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Fed officials closely monitor a range of measures of households’ and businesses’ longer-term inflation expectations, and while officials last month judged that those expectations were broadly consistent with the central bank’s 2% goal, “many participants raised the concern that longer-run inflation expectations could be beginning to drift up to levels inconsistent with the 2% objective,” the minutes said.
Fed Chairman Jerome Powell said last week the central bank had to raise rates rapidly, even if that raises the risk of recession, to avoid a worse danger for the economy—of higher inflation becoming entrenched. He said the Fed didn’t have the luxury of moving rates up gradually given how currently high inflation could lead consumers and businesses to expect elevated prices to persist.
“There’s a clock running here,” Mr. Powell said. “The risk is that because of the multiplicity of shocks, you start to transition into a higher-inflation regime. Our job is literally to prevent that from happening, and we will prevent that from happening.”
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 Mary Daly in comments to reporters on June 24 explaining her support for the larger rate rise.
Recent economic data have hinted at signs that several industries are cooling amid a shift away from spending on goods and toward services, though Fed officials last month saw some signs that such a shift could lead to “an intensification of upward pressure on prices in the services sector.”
Markets have been more volatile amid uncertainty over inflation and Fed policy. 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.
Average rates on the 30-year fixed mortgage, which neared 6% after the Fed’s meeting last month, have since declined to 5.74% last week, according to the Mortgage Bankers Association.
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