Federal Reserve officials have signaled their intention to resume interest rates increases, amid growing consensus that tighter monetary policy is necessary to combat high inflation in the largest economy of the world.
According to the minutes of the Federal Open Market Committee’s June meeting, “almost” all officials who attended said that “additional” increases in the Fed’s interest rate benchmark would be “appropriate”.
The “tight” labor market and the “upside risks” of inflation are still “key” factors in the outlook, nearly a year after the US Central Bank began an aggressive cycle to raise interest rates to calm price pressures.
According to minutes, some Fed representatives preferred a 25 basis-point increase in June interest rates, over the pause on further tightening, which was eventually backed by committee. Most Fed officials, however, noted that there was “uncertainty about the outlook” and added that additional information on the economy would be valuable.
Fed officials stated that they expect growth to be “subdued”, even though the “banking stress” has “receded”, compared to earlier this year. The Fed staff briefed at the meeting in June remained steadfast on their expectation that a mild recession would begin later this year, followed by a moderately-paced recovery.
The Fed’s June meeting was the first respite in its campaign to combat stubborn inflation, which had soared last year to an all-time high. After raising the benchmark rate 10 times in a row — sometimes at huge three-quarter- or half-point increments — officials decided to keep it at between 5 and 5.25 percent.
John Williams, the New York Fed’s president on Wednesday, reiterated that the central bank is determined to combat inflation. He also said that there was still “more work” to be done in regards to the interest rate increases. He said that economic data showed the demand for housing was still high and had stabilized after a period if softness.
The Fed Chair, Jay Powell, justified the pause in the economy by saying that the effects of previous rate increases still need to be fully felt by the economy. This is on top of the drag turmoil caused on hiring and economic growth earlier this year.
Most officials expect that the benchmark rate would eventually reach a range between 5.5% and 5.75%. This translates into two additional quarter-point rises, the first of which is likely to be at the Fed’s meeting at the end this month.
Powell, speaking at a forum held by the European Central Bank (ECB) last week said that he wouldn’t “take moving at successive meetings off the table” at all.
Price pressures in particular, but not exclusively in the service sector, continue to be a surprising source of concern. US consumer spending is also boosted by a very strong labour market. The Fed wants to dampen demand by raising borrowing costs.
The officials maintain that a period below trend growth and job losses are necessary to reach their goal of an inflation rate of 2 percent. According to June estimates, policymakers expect the economy to grow by 1 percent this year and 1,1 percent next year. The unemployment rate will peak at 4.5 percent. In May, the unemployment rate was 3.7 percent.
Fed officials expect no rate cuts until 2024, given that they believe “core” inflation (which excludes volatile food and fuel prices) will remain above the central bank’s long-standing target.