US Fed sees ‘more restrictive’ rates possible if inflation persists

WASHINGTON (BLOOMBERG) – United States Federal Reserve officials agreed last month that interest rates may need to keep rising for longer to prevent higher inflation from becoming entrenched, even if that slowed the US economy.

Policymakers backed raising rates 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 policy meeting released on Wednesday (July 6) in Washington.

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 to adjust the stance of policy as warranted,” the minutes showed.

Officials also “recognised that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2 per cent as critical to achieving maximum employment on a sustained basis”.

Two-year Treasury yields, which are sensitive to Fed policy, remained higher after release of the minutes.

Swaps traders held mostly steady at about 69 basis points the amount of Fed rate increases they foresee at their July meeting, meaning a half-point increase is seen a sure thing while a 75 basis-point move is almost certain.

The dollar index pared its gains slightly and the S&P 500 index was little changed.

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.

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Officials hiked rates by 75 basis points in June, the most since 1994, lifting their benchmark to a target range of 1.5 per cent to 1.75 per cent, and Fed chairman Jerome Powell suggested they could do the same thing again in July.

He told reporters at a post-meeting press conference that another 75 basis-point increase, or a 50 basis-point move, was most likely on the table when policymakers gather July 26-27.

Officials went big in June – despite previously signalling they favoured a 50 basis-point hike – after inflation data came in hot and a key indicator hinted that expectations for future price pressures could be accelerating among US consumers.