US central bank officials stressed at the June meeting the need to fight inflation even if that means slowing the economy, which already appears on the brink of recession.
According to the minutes of the Fed meeting, published today Wednesday, central bankers stressed that the 0.75% increase in interest rates (the largest in 28 years) was necessary to control the rise in the cost of living, which has rise to its highest levels since 1981.
Bank members also said that the next meeting in July will likely see another move of 50 or 75 basis points (+0.5% or +0.75% respectively).
“Participants agreed that the economic outlook warranted a shift to a more restrictive policy stance and acknowledged the possibility that an even more restrictive stance might be appropriate if elevated inflationary pressures persist,” the paper said.
At the same time, they also acknowledged that the tightening of monetary policy will likely come at a price.
“Participants acknowledged that policy tightening could slow the pace of economic growth for some time, but they felt that returning inflation to 2% was critical to achieving maximum employment on a sustained basis,” the summary said. practices.
Among other things, Fed officials felt they needed to convince both the markets and the public that they were determined to fight inflation.
“Many participants felt that a major risk facing the Commission is that higher inflation could take hold if the public begins to question the Commission’s resolve to adjust its stance as needed,” the minutes said.
According to the document, the Bank’s actions combined with its communication about its stance, “will be essential to restore price stability.”
However, the Fed’s assessment comes with the US economy on shaky ground.
The country’s GDP fell 1.6% in the first quarter and is on track for a 2.1% drop in the second, according to data tracked by the Atlanta Fed. This is something that would put the US economy technically into recession, albeit an extremely mild one.
Fed officials, however, expressed optimism about the economy’s long-term outlook at the meeting, even as they sharply downgraded their GDP forecasts to 1.7% in 2022 from 2.8% in March.
They pointed to some reports of slowing consumer sales and businesses cutting back on investment due to increased costs, as well as the war in Ukraine, ongoing supply chain problems and Covid lockdowns in China as sources of concern.
However, they estimated that monetary policy moves, which have brought the Fed’s key interest rate to a range of 1.5% – 1.75%, have already produced results, tightening financial conditions and reducing some market-based measures of inflation.
Source: Capital
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