Fed: Sharply higher rates may be needed to quell inflation

Jul 5, 2022, 11:10 PM | Updated: Jul 6, 2022, 12:55 pm
Federal Reserve Chairman Jerome Powell testifies before the House Financial Services Committee on T...

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

(AP Photo/Kevin Wolf)

WASHINGTON (AP) — Federal Reserve officials were concerned at their meeting last month that consumers were increasingly anticipating 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 key 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 that could embed an inflationary psychology and make it harder to slow price increases.

And 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 an increase 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 that 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. The minutes suggest that the policymakers could potentially raise rates above that level.

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 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.

Some economists described the Fed’s assessment of the economy, as laid out in Wednesday’s minutes, as outdated even though it is only three weeks old. Prices for oil, wheat and other commodities are falling, wage gains are moderating and growth is slowing. Those trends may mean that the Fed’s policymakers, who have said they will be “nimble” in responding to economic data, won’t raise rates as fast as financial markets expect.

“We very much hope that the sobering data since the June meeting will push members towards the smaller hike,” of a half-point rather than three-quarters in July, said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “They wanted to send a clear signal that they will not accommodate permanently higher inflation, but that job is done.”

The Fed had been expected to raise rates by a half-point at last month’s meeting but ended up announcing a three-quarter point hike instead. At his news conference afterward, Powell mentioned recent economic reports that had heightened concerns about high inflation. Those reports included inflation data for May, which showed that the pace of price increases reached a 40-year high.

Powell also cited a survey of consumer sentiment conducted by the University of Michigan that said consumers’ longer-term inflation expectations were starting to rise more quickly. That unnerved Powell and other Fed officials, because if people expect higher inflation, that sentiment can lead to an acceleration of prices. Workers could, for example, demand higher pay to cover their expectation of rising bills and expenses, leading companies, in turn, to raise prices further to offset their higher labor costs.

The Fed is seeking to convince the public that it will rise to the challenge and tame the pace of price increases, with the goal of keeping Americans’ inflation expectations in check.

There is “a significant risk now facing the (Fed) that elevated inflation could become entrenched if the public began to question the resolve” of Fed officials to combat higher prices, the minutes said.

As a result, the minutes said, tighter credit and “clear and effective communications” are critical to controlling inflation.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

FILE - A Tuesday, Dec. 8, 2020 file photo of a Nobel medal displayed during a ceremony in New York....
Associated Press

Nobel panel to announce winner of literature prize

STOCKHOLM (AP) — The winner of the Nobel Prize in literature will be announced Thursday at the Swedish Academy in Stockholm. While the recipient is notoriously unpredictable, one clear contender is Salman Rushdie, the India-born writer and free-speech advocate who spent years in hiding after Iran’s clerical rulers called for his death over his 1988 […]
1 day ago
Sri Lanka's President Ranil Wickremesinghe meets Japan's Prime Minister Fumio Kishida at Akasaka Pa...
Associated Press

Sri Lanka begins crucial debt restructuring talks with China

COLOMBO, Sri Lanka (AP) — Sri Lanka’s president said Thursday his government has started debt restructuring discussions with China, an important step toward finalizing an International Monetary Fund rescue of the island nation from its worst economic crisis. President Ranil Wickremesinghe told Parliament on Thursday that the initial talks will continue after China’s Communist Party […]
1 day ago
Destroyed Russian equipment is placed in an area at the recaptured town of Lyman, Ukraine, Wednesda...
Associated Press

Russian rockets slam into Ukrainian city near nuclear plant

KYIV (AP) — Seven Russian rockets slammed into residential buildings in Zaporizhzhia before dawn Thursday, killing two people and trapping at least five in the city close to Europe’s biggest nuclear power plant, the governor of the mostly Russian-occupied region said. The strikes came just hours after Ukraine’s president announced that the country’s military had […]
1 day ago
Authorities and local residents save a migrant during a large-scale rescue operation on the island ...
Associated Press

Dramatic rescues as boats sink off Greece; 16 women dead

NEAPOLI, Greece (AP) — Residents of a Greek island pulled shipwrecked migrants to safety up steep cliffs in dramatic rescues after two boats sank in Greek waters, leaving at least 16 people dead and dozens still missing. The coast guard said the 16 bodies — all of young African women — had been recovered overnight […]
1 day ago
FILE - Britain's Prime Minister Liz Truss makes a speech at the Conservative Party conference at th...
Associated Press

With division at home, UK’s Truss seeks to thaw EU relations

LONDON (AP) — After an acrimonious divorce and years of bickering, Britain’s government looks like it wants to make up with the European Union. The tax-cutting economic plans of the country’s new prime minister, Liz Truss, has her feuding at home with financial markets, the opposition and chunks of her own Conservative Party. But abroad, […]
1 day ago
FILE - Former Israeli Prime Minister Benjamin Netanyahu speaks to right-wing opposition party membe...
Associated Press

Israel’s Netanyahu leaves hospital after overnight stay

JERUSALEM (AP) — Former Israeli Prime Minister Benjamin Netanyahu was released from a Jerusalem hospital on Thursday, his party said, a day after he was admitted complaining of chest pains. Netanyahu, 72, was taken to the city’s Shaarei Tzedek hospital a day earlier after feeling unwell at synagogue services for the Jewish fasting day of […]
1 day ago

Sponsored Articles

Anacortes Christmas Tree...

Come one, come all! Food, Drink, and Coastal Christmas – Anacortes has it all!

Come celebrate Anacortes’ 11th annual Bier on the Pier! Bier on the Pier takes place on October 7th and 8th and features local ciders, food trucks and live music - not to mention the beautiful views of the Guemes Channel and backdrop of downtown Anacortes.
Swedish Cyberknife Treatment...

The revolutionary treatment of Swedish CyberKnife provides better quality of life for majority of patients

There are a wide variety of treatments options available for men with prostate cancer. One of the most technologically advanced treatment options in the Pacific Northwest is Stereotactic Body Radiation Therapy using the CyberKnife platform at Swedish Medical Center.
Work at Zum Services...

Seattle Public Schools announces three-year contract with Zum

Seattle Public Schools just announced a three-year contract with a brand-new company to the Pacific Northwest to assist with their student transportation: Zum.
Swedish Cyberknife 900x506...

June is Men’s Health Month: Here’s Why It’s Important To Speak About Your Health

According to the Centers for Disease Control and Prevention, men in the United States, on average, die five years earlier than women.
...

Anacortes – A Must Visit Summertime Destination

While Anacortes is certainly on the way to the San Juan Islands (SJI), it is not just a destination to get to the ferry… Anacortes is a destination in and of itself!
...

Ready for your 2022 Alaskan Adventure with Celebrity Cruises?

Celebrity Cruises SPONSORED — A round-trip Alaska cruise from Seattle is an amazing treat for you and a loved one. Not only are you able to see and explore some of the most incredible and visually appealing natural sights on the planet, but you’re also able to relax and re-energize while aboard a luxury cruise […]
Fed: Sharply higher rates may be needed to quell inflation