U.S. Federal Reserve (Fed) officials pointed to signs of a weakening U.S. economy at their last meeting, but still called inflation ‘too high’, before rising their benchmark interest rate by three-quarters of a percentage point in their bid to slow soaring prices last month.
In minutes of their July 26-27 meeting released Wednesday, policymakers said they expected the economy to expand in the second half of 2022. Many suggested growth would weaken as higher rates would set in. Officials noted that the housing market, consumer spending, business investment and industrial production had slowed after rising sharply in 2021.
Slower growth, they note, could “set the stage” for inflation to gradually fall to the central bank’s 2% annual target, although it remains “well above” that target. Policymakers have made it clear that, for now, they intend to keep raising rates enough to slow the economy.
In both June and July, the Fed sought to rein in high inflation by raising its policy rate an unusually high three-quarters of a percentage point twice. At their meeting last month, policymakers indicated that it might “be appropriate at some point to slow the pace of key rate increases.”
It remains unclear whether the Fed will announce another three-quarter-point rate hike at its next meeting on September 20-21 or instead impose a more modest half-point hike at that time. Since the Fed meeting three weeks ago, the economy has sent mixed signals: surprisingly strong hiring, a deterioration in the housing market and a surprising drop in inflation. Before policymakers meet again in September, there will be another monthly jobs report and another monthly consumer prices report.
The challenge for the US central bank is compounded by the fact that it was slow to react to a resurgence of inflation in the spring of 2021 as the economy recovered from the pandemic recession of 2020. For many months, President Jerome Powell called the high inflation “transient,” primarily due to supply chain backlogs that would soon unwind and ease inflationary pressure. They didn’t, and year-over-year inflation hit a 40-year high of 9.1% in June before falling slightly last month.
The Fed therefore had to catch up with a series of sharp rate hikes. It raised its key rate in March, then again in May, June and July. The moves pushed the central bank’s policy rate, which influences many consumer and business loans, up from near zero to a range of 2.25% to 2.5%, the highest rate since 2018. .
The Fed will do what it takes to get inflation under control and more rate hikes are expected, Powell said. However, many economists fear that the Fed will end up overdoing it by tightening credit to the point of triggering a recession.
Concerns about a potential recession have been mitigated, for now, by continued strength in the labor market. Employers added 528,000 jobs last month, and the unemployment rate hit 3.5%, matching a half-century low that was hit just before the pandemic hit in 2020.
In minutes released Wednesday, Fed policymakers acknowledged the strength of the labor market. Nevertheless, they also observed that hiring tends to be a lagging indicator of the health of the economy. They pointed to signs that the job market could be cooling, including an increase in the number of Americans filing for unemployment benefits, a drop in the number of Americans leaving jobs and a reduction in job openings.