Federal Reserve officials signalled they intend to resume interest rate increases amid a growing consensus that more tightening is needed to stamp out high inflation in the world’s largest economy.
According to minutes from June’s meeting of the Federal Open Market Committee, “almost all” officials who participated said that “additional increases” in the Fed’s benchmark interest rate would be “appropriate”.
They added that the “tight” labour market and “upside risks” to inflation were still “key factors” shaping the outlook nearly a year and a half after the US central bank embarked on an aggressive cycle of interest rate rises to tame price pressures.
Some Fed officials had favoured a 25 basis point increase in interest rates in June, rather than the pause in further tightening that was ultimately backed by the committee, according to the minutes. But most Fed officials noted the “uncertainty” about the outlook and said additional information about the economy would be “valuable”.
On the economic outlook, Fed officials said they expected growth to be “subdued” for the remainder of the year, even though “banking stresses” had “receded” compared to earlier in the year. According to the account, Fed staff who briefed policymakers at the June meeting stuck by their previous expectation of a “mild recession” starting later this year to be followed by a “moderately-paced recovery”.
The June meeting marked the first reprieve in the Fed’s campaign to root out stubborn inflation after it soared to a multi-decade high last year. Having raised the benchmark interest rate at 10 consecutive meetings – at times moving in jumbo three-quarter or half-point intervals – central bank officials opted instead to hold it steady at a target range of between 5 per cent and 5.25 per cent.
Jay Powell, the Fed chair, has justified the pause by saying the effects of earlier rate rises still needed to fully make their way through the economy, on top of the drag on hiring and growth caused by turmoil among regional banks earlier this year.
But additional rate rises this year are widely expected, with most officials projecting the benchmark rate will eventually hit a range of between 5.5 per cent and 5.75 per cent. That translates to two more quarter-point increases, with the first likely to come at the Fed’s next meeting at the end of this month.
Speaking at a forum hosted by the European Central Bank last week, Powell said he would not take “moving at consecutive meetings off the table at all”.
The likelihood of further rate rises stems from the surprising persistence of some price pressures, especially in the services sector. The US labour market also remains very strong, helping fuel consumer spending. By raising borrowing costs, the Fed aims to damp demand across the economy.
Officials maintain a period of below-trend growth and job losses will be necessary in order to achieve their goal of inflation averaging 2 per cent. According to estimates published in June, policymakers broadly anticipate the economy to grow 1 per cent this year and 1.1 per cent next year as the unemployment rate peaks at 4.5 per cent. In May, unemployment stood at 3.7 per cent.
No rate cuts are anticipated by Fed officials until 2024 given the expectation that “core” inflation, which strips out volatile food and energy prices, will remain well above the central bank’s long-standing target. – Copyright The Financial Times Limited 2023
