Federal Reserve officials have discussed the need to keep interest rates at levels that constrain the U.S. economy “for some time” in a bid to contain the highest inflation in about 40 years, according to minutes of their last meeting.
Minutes from the meeting, in which the U.S. central bank raised its benchmark policy rate by 0.75 percentage points for the second consecutive month, signaled that policymakers were determined to continue tightening monetary policy despite the first signs of an economic slowdown.
Officials noted that inflation had shown few signs of improving and that the “bulk” of the effect of rate hikes so far had yet to have a significant effect, according to the minutes. This likely means inflation will remain “uncomfortably high for some time.”
Given the enormity of the inflation problem and the “upside risks” to the outlook for price growth, officials supported raising interest rates to the point of dampening economic growth.
Raising rates to such a level would allow the Fed to raise them even “further, to sufficiently restrictive levels, should inflation be higher than expected,” the minutes note.
Some officials have signaled that once rates have been raised to the point of cooling the economy “enough” it would likely be “appropriate to hold that level to ensure inflation is firmly on the way back”. toward the Fed’s 2 percent target. hundred.
After July’s rate hike, the Fed is in the throes of its most aggressive monetary tightening cycle since 1981. The rate hike was implemented just a day before data showed the US economy contracting for a second consecutive quarter, a common marker of a recession.
In just four months, it raised its key rate from near zero to a target range of 2.25% to 2.5%.
At this level, the fed funds rate is in line with most policymakers’ estimates of a “neutral” policy when inflation is 2%, meaning it neither stimulates nor depresses economic activity.
Senior officials are actively debating whether a third successive 0.75 percentage point hike is needed at the next policy meeting in September or whether the Fed can start implementing more modest increases at future meetings.
Fed Chairman Jay Powell said at the news conference following the July announcement that as the central bank continues to tighten monetary policy, “it will likely become appropriate to slow the pace of increases “.
Financial markets seized on the comment – although Powell did not rule out “another unusually large increase” in September – and US stocks and other risky assets rebounded strongly.
The market recovery has accelerated in recent weeks, easing financial conditions for consumers and businesses and counteracting some of the effects of Fed tightening.
After the minutes were released on Wednesday, Treasury yields fell and stocks rose as investors interpreted the minutes as dovish. Expectations for where the Fed’s key interest rate would be at the end of the year fell slightly, from 3.6% to around 3.5%.
Some members of the Federal Open Market Committee and other Fed chairs pushed back on the idea that the central bank would scale back its aggressive approach, instead underscoring their commitment to pushing rates well into restrictive territory.
The minutes suggest Fed officials are increasingly of the view that job losses and an economic slowdown may be needed if the central bank is to stamp out inflation, with a “moderate” increase » unemployment from the current level of 3.5%, which is historically low.
Many participants, however, warned of the risk of the Fed tightening monetary policy too aggressively, but officials still seemed concerned about doing too little rather than too much.
In an interview with the Financial Times last week, San Francisco Fed President Mary Daly said the central bank was “not nearly done yet” in its fight against inflation. She added that he will need to see clear evidence that consumer price growth is slowing significantly before considering a possible pause in the rate hike cycle.
According to the latest inflation data, there was no increase in consumer price growth between June and July and a slower annual rate of 8.5%. This followed a surprisingly strong jobs report the previous week, which showed the US economy added 528,000 jobs in July.
Daly said she was inclined to support a half-point rate hike next month, but was “open-minded” about another 0.75 percentage point adjustment.