Fed: Sharply higher rates may be needed to quell inflation

Photo: The Canadian Press

Federal Reserve Chairman Jerome Powell testifies before the House Financial Services Committee on Thursday, June 23, 2022 in Washington. (AP Photo/Kevin Wolf)

Federal Reserve officials were concerned at their meeting last month that consumers were starting to anticipate higher inflation, and they signaled that much higher interest rates could be needed to restrain it.

The policymakers also acknowledged, in minutes from their June 14-15 meeting released Wednesday, that their rate hikes could weaken the economy. But they suggested that such steps were necessary to slow price increases back to the Fed's 2% annual target.

The officials agreed that the central bank needed to raise its benchmark interest rate to “restrictive” levels that would slow the economy’s growth and “recognized that an even more restrictive stance could be appropriate” if inflation persisted. After last month's meeting, the Fed raised its rate by three-quarters of a point to a range of 1.5% to 1.75% — the biggest single increase in nearly three decades — and signaled that further large hikes would likely be needed.

The Fed has been ramping up its drive to tighten credit and slow growth with inflation having reached a four-decade high of 8.6%, spreading to more areas of the economy. Americans are also starting to expect high inflation to last longer than they had before — a sentiment could embed an inflationary psychology and make it harder to bring inflation back to the Fed’s 2% target.

With midterm elections nearing, high inflation has surged to the top of Americans’ concerns, posing a threat to President Joe Biden and Democrats in Congress.

At a news conference after last month's Fed meeting, Chair Jerome Powell suggested that a rate hike of either one-half or three-quarters of a point was likely when the policymakers next meet late this month. The minutes released Wednesday confirmed that other officials agreed that such a hike would “likely be appropriate.” A rate hike of either size would exceed the quarter-point increase that the Fed has typically carried out.

Last month, the Fed released projections that showed the officials expect to raise their benchmark rate to 3.4% by the end of this year. At that level, the Fed’s key rate would no longer stimulate growth and could weaken the economy.

At the time of last month's meeting, the policymakers said the economy appeared to be expanding in the April-June quarter, with consumer spending “remaining strong.” Since then, though, the economy has shown signs of slowing, with consumer spending falling in May, after adjusting for inflation, for the first time this year. Home sales are plunging as mortgage rates have jumped, accelerated by the Fed’s rate increases.

The signs of economic sluggishness have intensified fears that high prices and rising interest rates could send the economy into a recession late this year or next year. Such concern has further complicated the Fed’s policymaking because a recession would normally lead it to cut rates to stimulate growth.