Federal Reserve Officials See Inflation Staying ‘Uncomfortably High’


Federal Reserve officials viewed their efforts to tame inflation as beginning to have an effect, according to the minutes of their meeting in July, but they also remained committed to further raising interest rates as prices stay too high for comfort.

Fed policymakers in recent months have become increasingly aggressive in their efforts to curb inflation, which this spring hit a four-decade high. In June, the central bank raised its benchmark interest rate three-quarters of a percentage point, the largest increase since 1994. They followed that up with another, equally large rate increase last month.

It is a near certainty that the Fed will raise rates again when central bank officials next meet Sept. 20-21. The question is by how much. Another three-quarter-point increase would be a strong indication that policymakers are determined not to relax their efforts until they see clear evidence that inflation has slowed. A half-point increase, though still large by historical standards, would suggest that the Fed believes it can ease up, if only slightly.

“Further rate hikes are clearly in the cards,” said Michael Gapen, chief U.S. economist for Bank of America. Another strong jobs report, he said, could lead to another three-quarter-point increase. But if that doesn’t happen, a smaller increase is more likely.

“More uncertainty means you should move at a more cautious pace,” he said.

Minutes from the Fed’s July meeting, which were released Wednesday, suggest the decision will depend on economic data released in the coming weeks, including reports on inflation and jobs.

“Participants concurred that the pace of policy rate increases and the extent of future policy tightening would depend on the implications of incoming information for the economic outlook and risks to the outlook,” the minutes said.

But as of their July meeting, policymakers continued to express concern about rapid price increases.

“Participants agreed that there was little evidence to date that inflation pressures were subsiding,” according to the minutes. “They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and would likely stay uncomfortably high for some time.”

As a result, Fed officials said they remained committed to moving to a “restrictive stance of policy” — meaning raising rates high enough that they meaningfully slow the economy.

In a news conference after its July meeting, Jerome H. Powell, the Fed chair, characterized the three-quarter-point increases as “unusually large” and said the decision on whether to continue them would depend on incoming economic data. That led some investors to conclude that policymakers were likely to ease the pace of rate increases, especially after the government reported that inflation had slowed more than expected in July.

But in speeches and interviews after the meeting, Fed officials pushed back against the idea of a Fed “pivot” on inflation. In an interview with The New York Times this month, Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said that he was surprised by markets’ interpretation and that policymakers were still “a long way away” from winning their fight against inflation.

The central bank often uses the minutes of past meetings to communicate its thinking, and investors on Wednesday were watching closely for signals of how the Fed might act. But policymakers provided few clear clues. They said it would be appropriate to slow the rate of rate increases “at some point,” but gave no indication as to when.

Seth Carpenter, chief economist at Morgan Stanley, said the minutes were “pretty two-handed,” neither committing to another supersize rate increase nor ruling one out.

Mr. Powell will have another chance next week to make his thinking clear when he gives a speech at the Fed’s annual symposium in Jackson Hole, Wyo.

When consumer prices began rising rapidly last year, Mr. Powell and his colleagues initially dismissed the phenomenon as “transitory,” the effect of the reopening of the economy as the pandemic restrictions eased. Instead, prices continued to rise as demand remained strong and supplies of both workers and goods struggled to keep up.

Late last year, policymakers indicated they no longer viewed inflation as transitory and would begin moving to bring it to heel. The Fed has been raising interest rates since last spring in the hopes that by making borrowing more expensive for both consumers and businesses, it can bring down demand and ease pressure on prices.

In the minutes of their July meeting, Fed officials said there was some evidence their actions were “starting to affect the economy, most visibly in interest-sensitive sectors,” even before the full impact of their policies has been felt. Still, the Fed is likely to need to see more than one or two comforting reports before it begins to change course, said Sarah House, a senior economist at Wells Fargo.

“It’s not enough that there are signs of inflation pressures easing,” she said. “They really need to actually see it in the data.”

The data released since the July meeting has sent conflicting signals. Consumer prices were roughly flat in July, and the year-on-year pace of inflation cooled. The housing market has slowed sharply, suggesting that higher borrowing costs are beginning to take a toll.

On the other hand, hiring and wage growth remained strong in July, and consumers continue to spend, trends that, if they continue, could keep upward pressure on prices.

“The last thing they would want to do is to declare a premature victory,” said Ian Shepherdson, chief economist of Pantheon Macroeconomics, a forecasting firm. “They were badly scarred by the transitory debacle, and they won’t get caught again.”

Joe Rennison contributed reporting.



Source: https://www.nytimes.com/2022/08/17/business/federal-reserve-minutes.html