Federal Reserve officials made their biggest interest rate hike since 1994 at their June meeting after inflation data spooked them, meeting minutes showed this, with policymakers expressing concern that persistent and stubborn price pressures posed a “significant risk” of becoming a more permanent feature of the economy if the central bank did not act decisively. .
The Fed raised its main key interest rate by three-quarters of a percentage point last month as it tried to raise the cost of borrowing across the economy and dampen consumer demand and companies. The move, which followed a half-point hike in May and a quarter-point hike in March, was a significant escalation in the central bank’s battle against rapid inflation.
Notes from the meeting, released on Wednesday, shed light on what motivated officials to take such a big step – and what it could mean in the future. Policymakers were unsettled by a further acceleration in the inflation measure of the consumer price index, which climbed 8.6% in the year to May. And officials worried that if they didn’t take enough action, consumers and businesses might start to expect rapid price increases to last and behave in ways that make rapid inflation more permanent and further. harder to undo.
A number of officials saw the consumer price measure “as reinforcing the idea that inflation would be more persistent than they had previously anticipated,” according to the minutes.
Many central bankers “considered that a significant risk now facing the Committee was that high inflation could take hold if the public began to question the Committee’s resolve to adjust the policy stance as it must”.
Understanding inflation and its impact on you
Fed officials acknowledged they would need to slow the economy and labor market in their bid to curb rapid price increases, the minutes suggested, and in fact expressed determination to raise rates. of interest to a point where they would begin to weigh significantly on the economy. growth.
Participants expected it to be appropriate to raise rates at their next meeting in July by half or three-quarters of a percentage point, agreeing that “the economic outlook warranted a policy restrictive” and that “an even more restrictive stance may be appropriate should high inflationary pressures persist.”
Investors, economists and households are increasingly concerned that central bank policy adjustments could trigger a recession. The minutes point out that if central bankers want to be flexible and responsive to incoming data, the risk of triggering a downturn is probably not enough to dissuade them from taking aggressive action to rein in inflation.
“Participants recognized that the policy tightening could slow the pace of economic growth for some time, but they saw the return of inflation to 2% as essential to achieving maximum employment on a sustainable basis,” showed the minutes.
The Fed is working in a challenging global environment as pandemic-related supply chain issues and commodity price hikes exacerbated by war in Ukraine ripple through economies. Inflation has erupted across much of the world, and central bankers in Europe, the UK, Canada, Australia and parts of Asia are also raising or preparing to raise rates – often at the fastest pace in years – to try to curb growth and bring prices back down.
While fuel prices have cooled this week in global markets as investors worry about an impending slowdown, it is unclear whether this will last at a time when military developments in Eastern Europe could upset the outlook for energy prices at any time.