“Elevated inflation could become entrenched if the public began to question the resolve” of the Fed to fight it, minutes from the central bank’s June meeting revealed.
Updated at 2:35 pm EST
The Federal Reserve was worried that inflation may become so intrenched in the U.S. economy that the public would question its resolve to fight it, minutes of its June policy meeting revealed Wednesday, as it unveiled the biggest hike in three decades and argued for more “restrictive” rates over the coming months.
The minutes indicated that a larger-than-expected rate hike was needed in June in order to tame the fastest inflation in four decades, noting that the outlook for consumer price increases had deteriorated leading up to the June 15 decision.
The Fed lifted its base lending rate by 75 basis points, the biggest since 1994, to a range of 1.5% to 1.75% last month and said near-term rate moves would be needed in order to combat the fastest inflation since the early 1980s. The Fed also raised its forecasts for U.S. unemployment, to a rate of 3.7% from a prior forecast of 3.5%, while cutting its 2022 GDP growth estimate to 1.7%, well shy of its previous indication of 2.8%.
Fed Chair Jerome Powell, who had guided investors to a rate hike of only 50 basis points heading into the June meeting, said at the time that rate hikes of that size won’t be “common”, but current market betting suggests an 88% chance of a similar-sized hike when the Fed meets later this month in Washington.
“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 Fed minutes read. “On this matter, participants stressed that appropriate firming of monetary policy, together with clear and effective communications, would be essential in restoring price stability.”
“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 added.
U.S. stocks pared earlier declines following release of the minutes at 2:00 pm Eastern time, with the Dow Jones Industrial Average trading 145 points higher on the session and the S&P 500 gaining 22 points. Benchmark 10-year Treasury note yields, meanwhile, edged modestly higher to 2.92%.
The Federal Reserve’s preferred measure of U.S. inflation eased for a second month in May, data indicated last week, with the core PCE Price index slowing from a multi-decade high to an annual rate of 4.7%.
The CME Group’s FedWatch tool is showing an 88% chance of a 75 basis point rate hike in July, as well as an 85% chance of follow-on move of 50 basis points in September.
The Atlanta Federal Reserve’s GDPNow forecasting tool, a real-time benchmark, suggests U.S. economic growth is shrinking at a 2.1% clip, while the Commerce Department’s final estimate of first quarter growth showed a contraction of 1.5%, the first in two years.
