Federal Reserve Officials Warn of Rate Hikes If Inflation Persists: Minutes

Federal Reserve Officials Warn of Rate Hikes If Inflation Persists: Minutes
Federal Reserve Bank Chair Jerome Powell announces that interest rates will remain unchanged during a news conference at the Federal Reserve's William McChesney Martin building in Washington on June 12, 2024. (Kevin Dietsch/Getty Images)

Federal Reserve officials warned at the June policy meeting that if inflation remained elevated or continued to rise, policymakers might need to raise interest rates, according to minutes from the meeting released on Wednesday.

Officials noted that they are not ready to cut interest rates until they have obtained “greater confidence” that the inflation rate is heading toward the central bank’s 2 percent goal.

But without restoring price stability, persistent inflation pressures could lead to tighter financial conditions, the minutes stated. However, employing tighter monetary policy could lead to “deteriorating household financial positions, especially for lower-income households,” which, “might prove to have a larger negative effect on economic activity than the staff anticipated.”

As the effects of the central bank’s rate hikes since March 2022 travel through the broader economy, officials anticipate that heightened weakness in demand could lead to a higher unemployment rate than policymakers previously forecast.

“Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past when lower demand for labor was felt relatively more through fewer job openings,” the summary noted.

Should economic conditions deteriorate, meeting participants asserted that monetary policy “should stand ready to respond to unexpected economic weakness.”

Still, Fed officials believe they are more confident toward achieving the 2 percent inflation target following the May numbers.

Market Reaction

The tech-heavy Nasdaq Composite Index and the S&P 500 closed at fresh records. The Dow Jones Industrial Average was little changed at the end of the midweek trading session.

U.S. Treasury yields were red across the board, with the benchmark 10-year yield down 7.5 basis points to 4.36 percent. The 2-year yield shed 3.1 basis points to 4.706 percent, while the 30-year bond declined 8 basis points to 4.528 percent.

The U.S. Dollar Index (DXY), a measurement of the greenback against a basket of currencies, fell 0.34 percent to 105.37 percent. Year-to-date, the DXY is up around 4 percent.

With the Fed’s hiking cycle in its 27th month, the U.S. economy is beginning to see signs of slowing down, said Jim Besaw, the CIO of GenTrust, in an email to The Epoch Times.

The Bloomberg economic surprise index, which measures the difference between actual economic data and analysts’ forecasts, is near its lowest level of the past 5 years,” Mr. Besaw said in a note. “Ultimately, there is a narrow path that central banks are trying to achieve where inflation returns to target without a material slowdown in growth.”

One of these is the labor market, he said.

Payroll processor ADP’s National Employment Report showed that the private sector added 150,000 new jobs in June, falling short of the consensus estimate of 160,000. This was also down from the upwardly revised 157,000 in May.

The June jobs report, which will be released on Friday, is expected to show the economy adding 190,000 new jobs and an unemployment rate of 4 percent.

At the June Federal Open Market Committee (FOMC) policy meeting, officials kept the Fed’s benchmark interest rate unchanged at a range of 5.25 percent and 5.5 percent.

Additionally, the monetary authorities trimmed their rate-cut expectations from three to one, with the year-end median policy rate clocking in at 5.1 percent, according to the updated Summary of Economic Projections.

Fed Chair Not Ready to Cut Yet

Speaking at a central banking forum in Portugal on July 2, Fed Chair Jerome Powell said he was pleased by the “bit of progress” in the disinflation process following last month’s inflation figures.

“The last reading and the one before it to a lesser extent, suggest that we are getting back on the disinflationary path,” Mr. Powell noted.

After four consecutive months of hotter-than-expected inflation data, the consumer price index (CPI) eased in April and May. The central bank’s preferred inflation gauge—the personal consumption expenditures (PCE) price index—also slowed, with the latest reading coming in at 2.5 percent.

Still, he expressed caution moving ahead.

“We want to be more confident that inflation is moving sustainably down toward 2 percent before we start the process of reducing or loosening policy,” the U.S. central bank chief said.

“We’re well aware that if we go too soon, that we can undo the good work we’ve done,” he added. “If we do it too late, we could unnecessarily undermine the recovery and the expansion.”

Other monetary policymakers, such as Chicago Fed President Austan Goolsbee, have suggested the institution could pull the trigger on a rate cut in the coming months amid various warning signs in the broader economy.

“We are restrictive. The fed-funds rate in real terms, interest rate minus inflation, is as high as it has been in many decades. And as inflation comes down, that gets tighter,” Mr. Goolsbee told CNBC on July 2, adding that the real economy is beginning to weaken.

In the first quarter of 2024, the U.S. economy expanded 1.4 percent, according to the Bureau of Economic Analysis (BEA).

Looking ahead to the second quarter print, the Atlanta Fed’s GDPNow model estimates 1.5 percent growth, down from as high as 4.2 percent in early May.

As for rate cuts, the futures market is penciling in the first quarter-point rate reduction at the September policy meeting, CME FedWatch Tool data show.

From The Epoch Times