Fed fear of entrenched high inflation fueled sharp rate hike, minutes show

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WASHINGTON, July 6 (Reuters) – Deteriorating inflation and concern over waning confidence in the Federal Reserve’s power to improve it prompted U.S. central bank officials to rally to a disproportionate increase in interest rates and a firm reaffirmation of their intention to lower prices. control, showed the minutes of the political meeting of June 14 and 15.

Data released in the days leading up to that meeting showed consumer inflation in May accelerating to an annualized rate of 8.6%, defying Fed hopes that the pace of price increases peaked in the spring.

“Participants agreed … that the near-term inflation outlook had deteriorated since the May meeting,” the minutes read, justifying last month’s 0.75 percentage point rise as part of a switch to a “restrictive” monetary policy.

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With families stressed by rising food and gas prices, and no evidence that Fed actions to date have begun to stop the fastest inflation spike in 40 years, “de many participants felt that a significant risk … was that high inflation might take hold if the public began to question the resolve of the (Federal Open Market) Committee to adjust the policy stance as it should be,” according to the minutes, which were released on Wednesday.

The result was the first 0.75 percentage point rate hike in the United States since 1994, and the promise of more to come, with participants estimating that a 50 or 75 basis point increase in the rate interest in a key day would probably be appropriate at the policy meeting later this month.

The group, in a show of unanimity that erased the typical fault lines between inflation ‘hawks’ and ‘doves’, noted a willingness to raise interest rates as high as necessary to bring the inflation to the Fed’s 2% target, and a need to convince the public that it was ready to do so.

“Participants agreed that the economic outlook warranted a shift to a restrictive policy stance, and they recognized the possibility that an even more restrictive stance may be appropriate should elevated inflationary pressures persist,” the minutes read.

Since then, Fed Chairman Jerome Powell has amped up his own rhetoric, saying last week that “the clock is sort of ticking” on the Fed to show it could tame prices before public psychology does. starts to get worse.

At the meeting, there were fears that such a shift was already happening, with “many participants” worried that “long-term inflation expectations could start to drift”.

“LOT OF CHANGE”

The minutes did not mention recession risk and, in fact, Fed officials said they believed the data showed U.S. gross domestic product “growing in the current quarter,” with a still tight labor market.

But they acknowledged the risk that things could slide, and in particular that Fed policy could have a bigger impact than expected.

Some analysts say this could already be taking shape, noting a recent sharp drop in oil and other commodity prices, falling bond yields and growing recession fears.

Following the release of the minutes, a closely watched aspect of the bond market showed growing concerns about a possible US recession in the coming months.

“There have really been a lot of changes since they last met,” said Jim Paulsen, chief investment strategist for the Leuthold Group in Minneapolis. “There’s a strong message coming from the economy and the bond market and the commodities market that (Fed policy) seems to be working and maybe the Fed would like to think about slowing down.”

Upcoming jobs and inflation data will fuel the debate, but at this point investors expect the Fed to approve another 75 basis point rate hike at the next meeting on May 26-27. July, as the central bank pursues a rapid change in monetary policy.

Less than a year ago, officials were still pledging to keep the monetary taps wide open, with the federal funds rate near zero and $120 billion in monthly money-generating bond purchases, until that there was “substantial further progress” in the labor market and inflation was “moderately on track” to exceed the Fed’s 2% target “for some time.”

Now officials are looking at a job market seen as unsustainably tight – new data for May showed there were still nearly two jobs open for every unemployed person – with inflation at a high level and policymakers saying they are ready to courting an economy-wide recession in order to contain public expectations about inflation. Read more

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Reporting by Howard Schneider; Additional reporting by Sinead Carew; Editing by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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