Federal Reserve Prepares More Big Rate Hikes Amid Risk That High Inflation Could ‘Become Entrenched’


Federal Reserve officials reaffirmed their commitment to fighting inflation with big rate hikes and pledged to use “more restrictive policy” as needed, especially amid “significant risk” that high consumer prices could become “entrenched” for longer, according to the minutes from the central bank’s latest policy meeting.

Key Facts

The Federal Reserve doubled down on its commitment to bringing down inflation, even if it means implementing a “more restrictive [policy] stance,” according to minutes from the central bank’s June meeting.

With surging inflation showing no signs of abating, Fed policy makers plan to raise interest rates by either 50 or 75 basis points at the upcoming meeting in July.

While tighter monetary policy “could slow the pace of economic growth for a time,” it is “critical” to achieving long-term inflation goals, central bank officials agreed, pledging to take more aggressive action even if it means hurting economic growth.

The central bank also acknowledged that there is now a “significant risk” that elevated inflation “could become entrenched” for a longer period of time, which would require more significant interest rate hikes and tighter policy.

Despite remaining optimistic about the long-term outlook for the U.S. economy, Fed officials slashed their full-year GDP forecasts to 1.7%, down from a previous estimate of 2.8% in March.

The stock market rallied shortly after the release of the latest Fed minutes on Wednesday: The Dow Jones Industrial Average rose 0.2%, nearly 100 points, while the S&P 500 gained 0.4% and the tech-heavy Nasdaq Composite 0.4%.

Crucial Quote:

“Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” according to the latest Fed minutes. “Many participants judged that a significant risk now facing the Committee was that elevated inflation could become entrenched.”

Key Background:

The Fed last raised interest rates by 75 basis points in June—the largest increase in 28 years—in a bid to combat red-hot consumer prices, which jumped 8.6% in May compared to a year ago. Fed Chair Jerome Powell said at the time that the central bank will continue to hike rates aggressively, with another 75-basis-point increase under consideration for the next meeting in July.

What To Watch For:

“What markets want to hear now, is what the Fed has in mind if economic data releases continue to signal a deeper more serious downturn without a commensurate easing in inflation,” says Quincy Krosby, chief equity strategist for LPL Financial. “And what markets hope for is that by the next meeting inflation is on its way towards plateauing , indicating that although behind the curve initially, the Fed’s restrictive policy is indeed working.”

Further Reading:

Here’s How Markets Reacted Last Time The Fed Hiked Rates By 75 Basis Points (Forbes)

Dow Jumps 300 Points After Powell Says Fed Could Hike Rates By 75 Basis Points Again In July (Forbes)

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