Fed Minutes Show Officials Chose to Hike Interest Rates in June Knowing the Economy Could Be at Risk | Economy


Federal Reserve officials met in June and decided raising interest rates aggressively was the price to pay for curbing inflation, even if that resulted in an economic slowdown, minutes of the central bank’s mid-June meeting released on Wednesday show.

The Federal Open Market Committee, the group that sets monetary policy for the Fed, was clearly worried about the central bank’s credibility and decided a larger than normal rate hike was needed as members approved a 75 basis point increase in interest rates.

Officials noted that, “if inflation expectations were to become unanchored, it would be more costly to bring inflation back down to the committee’s objective” of annual inflation averaging 2%.

The minutes said that “participants concurred that the labor market was very tight, inflation was well above the committee’s 2% inflation objective, and that the near-term inflation had deteriorated since the time of the May meeting.”

“Many participants judged that a significant risk now facing the committee was that elevated inflation could become entrenched if the public began to question the resolve of the committee to adjust the stance of policy as warranted.”

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The Fed’s action followed a May reading of the consumer price index that showed inflation running at an annual rate of 8.6%, an increase from April’s elevated level. Although the Fed follows a less well-known measure of inflation for its own internal guidance, other readings of inflation showed continued upward pressure on prices ahead of the June meeting.

The stock and bond markets reacted sharply to the rate increase, igniting a series of volatile trading days, which have since settled somewhat. In fact, bond yields have come down from the highs they reached immediately following the Fed’s move.

And there have been some glimmers of hope in the latest economic data that inflation, while still at 40-year highs, is starting to ebb. Gasoline prices, for example, have fallen about 40 cents or so from the $5-a-gallon mark seen just a few weeks ago. And prices for various industrial commodities have come down from the peaks of earlier this year.

Bond yields, meanwhile, have fallen from their highs of a month ago although many of these positive trends also reflect increasing predictions of a coming recession. Still, they could lessen the blow that the Fed’s planned interest rate hikes will have on the markets going forward.

“The market may not react as negatively given the dramatic drop in commodity prices and interest rates over the past three weeks,” says JR Gondeck, managing director and partner at The Lerner Group. “This indicates the Fed might be very close to the end of increasing interest rates after July.”

Purchasing managers in the services sector of the economy reported a slowing in the rate of price increases from their suppliers, according to the Institute of Supply Management survey for June released Wednesday.

“However, nagging supply constraints pushed up the backlog of orders in June, frustrating logistics companies across the globe,” notes Jeffrey Roach, chief economist for LPL Financial.

“The most concerning part of the ISM report was about the labor market,” Roach added. “Employment in the services sector appeared to weaken in June and we will likely see a downshift in hiring in the upcoming monthly job report on Friday.” “We expect above-average job growth in June but at a much slower pace than earlier this year with no likely changes in the unemployment rate as the labor market remains tight,” he said.

Wednesday’s report on job openings also showed that, while they have dropped slightly to 11.3 million for June, they remain at a level that means nearly two jobs for every unemployed worker.

Analysts are forecasting around a quarter million new jobs were created in June, well below the 390,000 in May, but estimates range quite a bit as the slowing economy makes it harder to predict.

The downshifting in the job market was welcomed at the White House.

“The overall strength in the labor market, including strong job creation, low levels of layoffs, and now two months in a row of substantial reductions in job openings positions our economy to transition from a historic economic recovery to steady, stable growth,” the official said Wednesday. “That means bringing down inflation, without giving up the gains we have made.”

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