Fed sees ‘more restrictive’ policy as likely if inflation fails to come down, minutes say

According to the meeting minutes, Federal Reserve officials in June stressed the need to fight inflation even if it meant slowing the economy.

The July meeting is expected to see another 50- or 75-basis point move. One hundredth of 1 percentage point is the basis point.

The minutes stated that participants continued to anticipate that increases in the target range for the federal funds rate would be appropriate to achieve the committee's objectives. The participants decided that an increase of 50 or 75 basis points would be appropriate.

In raising benchmark borrowing rates by three quarters of a percentage point, central bankers said the move was necessary to control cost-of-living increases.

The document said that participants agreed that the economic outlook needed to be moved to a restrictive stance of policy.

Policy tightening is likely to come with a price. The meeting summary stated that participants saw the return of inflation to 2 percent as critical to achieving maximum employment. The move to hike rates by 75 basis points followed an unusual sequence in which policymakers seemed to have a last-minute change of heart after saying for weeks that a 50 basis point move was almost certain The rate-setting Federal Open Market Committee chose the more stringent path after seeing consumer prices run at an 8.6% 12-month rate.

They needed to assure markets and the public that they are serious about fighting inflation, according to officials at the June 14-15 meeting. If the public questioned the resolve of the Committee to adjust the stance of policy as needed, elevated inflation could become entrenched, according to the minutes. The approach comes with the US economy on shaky ground. The Atlanta Fed data tracker shows that the gross domestic product fell in the first quarter. That would cause the economy to go into a recession. At the meeting, Fed officials expressed optimism about the longer-term path of the economy, though they did lower GDP forecasts sharply. The war in Ukraine is one of the concerns. The increase in headline personal consumption expenditures prices is expected to be 5.2%, compared to the previous estimate of 4.3%. In May, PCE inflation was 6.3%. As tighter policy could slow growth, the risks to the outlook were skewed lower. Fighting inflation was the priority of the committee. Officials noted that the policy moves, which put the Fed's benchmark funds rate in a range of 1.5%-1.75%, already have yielded results. Two measures that compare inflation-indexed government bonds with Treasurys have fallen to their lowest levels in over a year. After a series of rate hikes, the Fed would be in a good position to evaluate the success of the moves. If inflation doesn't come down, more restrictive policy could be put in place. There is a chance that the Fed will have to cut rates as early as the summer of 2023.