Washington — The Federal Reserve has decided to stop rapid inflation before it becomes a permanent feature of the U.S. economy, despite early signs of a slowdown and fear of recession. , We are heading towards another three-quarters rise in interest rates later this month. mount.
Economic data suggests that the United States may be on a difficult path. Consumer confidence plummets and the economy could record negative growth for the second straight quarter. New factory order Sagging Oil and gas commodity prices have fallen Investors are afraid of an imminent recession, so it has fallen sharply this week.
However, that weakening is unlikely to discourage central bankers. Some deceleration is welcome news for the Fed, which is actively trying to cool the economy, and its commitment to restore price stability could keep officials on the path of aggressive policy.
Inflation measures have been implemented at or near the fastest pace in 40 years, although the employment market has eased somewhat. 1.9 Available jobs For all unemployed. Federal policymakers may focus on these factors as they head to the July meeting. In particular, the policy rates that drive the cost of borrowing money are still low enough to stimulate economic activity rather than deduct it. ..
Minutes from the June Meeting of the Federal Reserve Board, Released on WednesdayAuthorities have revealed that as policymakers intensify their fight against inflation, they are keen to raise interest rates to a point that is squeezing growth.
The central bank will announce its next interest rate decision on 27 July, releasing some key data points such as the latest June employment numbers and the updated CPI inflation rate. Set to stone. But assuming the economy remains strong, inflation remains high, and moderation flicker is far from definitive, big interest rate movements may await.
Federal Reserve Chair Jerome H. Powell said the central bank will discuss an increase of 0.50 or 0.75 percentage points at an upcoming rally, but authorities will be at a faster pace if recent economic developments are maintained. Began to line up behind his actions.
“If the conditions were exactly the same as attending the meeting today, that is, if the meeting was today, I would advocate 75 because I have never seen the inflationary numbers I need to see.” Loretta J. Cleveland Federal Reserve Bank of Cleveland, Governor Mester, said in a television interview last week.
The Federal Reserve raised interest rates by 0.75 percentage points in June. This was the first move of its scale since 1994, boosted by growing concern that rapid inflation would not slow down as expected and risk becoming a more lasting feature of the economy.
Investors didn’t expect such a big change until just before the meeting, but suddenly there was a big increase, but policy makers agreed to grow early in the decision-making process in July. Began to show that.
Part of the rise in urgency, according to economists, stems from the perception that the Fed is behind the curve and is trying to fight inflation when interest rates are rising rapidly but remain relatively low. There is likely to be.
Michael Ferroli, Chief US Economist at JPMorgan Chase, said: “It takes serious disappointment for them to shift down at this meeting.”
Currently, the Fed’s interest rates are set in the range of 1.5-1.75%. This is much higher than the near-zero setting in early 2022, but still probably low enough to stimulate the economy. Officials say they want to raise growth “quickly” to the point where it begins to weigh on growth. They estimate that this is a rate of about 2.5 percent.
In their view, “Inflation is so high and the labor market is so tight that we don’t need to add more accommodation at this point,” said the Fed’s board of directors, an economist for more than a decade. Manager. “That’s why they are rising so aggressively.”
The central bank says it’s not inevitable, but knows that there is a potential recession due to the surge in interest rates. But they signaled that they would be willing to inflict some financial distress if it was necessary to combat inflation.
Powell said the Fed’s ability to moderately slow the economy and cool inflation depends on factors beyond its control, such as the trajectory of the war in Ukraine and the roar of the global supply chain. I emphasize it repeatedly.
For now, Fed officials are unlikely to interpret early evidence of a cold as a sure sign of a recession.The unemployment rate has been near its lowest level in 50 years and the economy is on average almost 500,000 jobs per month So far, in 2022, consumer spending has been relatively strong, albeit slightly below the weight of inflation.
Meanwhile, authorities have been nervous about both the speed and sustainability of inflation. Consumer price index indicators have risen 8.6% over the year to May, with several economists saying they continue to accelerate each year until the June report, which will be released on July 13. Inflation Insights estimates it will be around 8.8%.
“I’ll probably get a few months of moderation after receiving this June report,” he said.
According to economists, the Fed’s recommended inflation index, the Consumer Expenditure Index, may have already peaked. However, it still rose 6.3% in the year to May, more than triple the central bank’s 2% target. Many households struggle to keep up with rising housing, food and transportation costs.
There are promising signs that inflation could slow down quickly, although retailers have accumulated inventories, World Commodity Gas Prices Consumer demand for some commodities may have begun to slow as it has fallen this week. These indicators may be of little use in comforting the central bank at this stage.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So tomorrow the dollar won’t fall as much as it does today. This is usually expressed as an annual change in the prices of daily necessities and services such as food, furniture, apparel, transportation and toys.
The Fed has been repeatedly disappointed at the false dawn. Authorities expected inflation to peak last summer, but only saw it accelerate again in the fall. They have received regular Wall Street predictions that it may have reached its peak, but they have not yet proven to be correct.
And Fed officials are increasingly worried that they need to prove their commitment to lower prices. If Americans come to believe that inflation remains high year by year, that is, if inflation expectations change in Fed terminology, they may demand larger wage increases to cover expected costs. I have. Similarly, a company may create a habit of continuously charging more to cover larger wage claims and create a cycle of rising prices.
It will make it more difficult and more painful to eradicate inflation.
At a June meeting of the Fed’s policy-making committee, many officials said, “The significant risks facing the committee now question the committee’s resolutions to help the public adjust their legitimate policy stance. We have determined that rising inflation could take hold if we begin to show. “According to the minutes released Wednesday.
This is part of the rationale behind the Fed’s fast interest rate path.Staff Signaled it They are trying to stop the price hike and expect to push interest rates up to about 3.4 percent by the end of the year. For example, we can achieve that by raising 0.75 percentage points in the upcoming July meeting, 0.5 percentage points in September, and 0.25 percentage points in November and December.
“If possible, we hope to curb inflation before it settles in the economy,” said James Bullard, president of the Federal Reserve Bank of St. Louis. Presentation in Zurich June 24th.
It’s also the logic for making big moves faster, not later. Charles L. Evans, President of the Federal Reserve Bank of Chicago, said: I told reporters A few days ago, the 0.75 percentage point volatility in July was “a very reasonable place to hold discussions,” which could happen unless inflation began to ease.
The Federal Reserve will get new information by the July meeting, but central banks may find that incoming data is less sensitive than usual in today’s environment. .. Minor updates may be of little help in changing the situation where rising prices have been in turmoil for months, and authorities say rising inflation expectations may go out of control. believe.
“The data they correspond to has been accumulated over the past year,” said JP Morgan’s Ferroli. “For the past year, they have noticed that they missed the boat due to inflation.”