Fed Sees ‘More Restrictive’ Rates Possible If Inflation Persists

• Raising rates could slow GDP growth over time, minutes show
• Return to 2% inflation ‘critical’ for employment mandate

Bloomberg

Federal Reserve officials solidified their resolve in June to keep raising interest rates for longer to prevent higher inflation from becoming entrenched, even if that slowed the US economy.

Policy makers increased interest rates by 75 basis points last month and backed hiking them at their next meeting in July by either 50 or 75 basis points, according to minutes of the Federal Open Market Committee’s June 14-15 meeting released Wednesday. They viewed maintaining the central bank’s credibility to control inflation as crucial.  

“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,” the minutes showed. “They recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”

The record was heavy with references to price pressures and why they might take time to ease. Officials “recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2% as critical to achieving maximum employment on a sustained basis.”

Two-year Treasury yields, which are sensitive to Fed policy, pushed higher after release of the minutes and investors continued to bet the central bank would hike by 75 basis points later this month.

The Fed’s aggressive push to curb the hottest inflation in 40 years has convulsed financial markets as investors fret that tighter monetary policy will tip the US economy into recession. The word “recession” was not mentioned once in the minutes, compared with 90 references to inflation.

“They can lose the battle on the economy, but they can’t lose the war on the inflation anchor,” said Mark Spindel, chief investment officer at MBB Capital Partners LLC. “Powell’s telling you, ‘We’re not blinking’.”

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