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Fed officials signal restrictive rates may be needed ‘for some time’

Federal Reserve officials discussed the need to keep interest rates at levels that will constrain the economy “for some time” in an effort to contain the highest inflation rate in about 40 years, according to a report from their most recent meeting.

Minutes from the meeting, when the US central bank raised its key rate by 0.75 percentage points for the second month in a row, indicated policymakers were determined to continue tightening monetary policy despite early signs that the economy was cooling. .

Officials noted that inflation showed little sign of improving and that most of the impact of tariff hikes so far had not had a significant effect, according to the minutes. That probably means inflation will remain “uncomfortably high” for some time.

Given the magnitude of the inflation problem and the “upside risks” to the outlook for price growth, officials have supported raising interest rates to the point of slowing economic growth.

By raising rates to such levels, the Fed could actually raise them “further, to appropriately restrictive levels, should inflation turn out higher than expected,” the minutes said.

Some officials indicated that once interest rates were raised to the point where they cooled the economy “sufficiently”, it would likely be “appropriate to maintain that level to ensure inflation was firmly on track” toward target. from the Fed of 2 a year. cent.

After the rate hike in July, the Fed is in the throes of its most aggressive cycle of monetary tightening since 1981. The rate hike came just a day before new data showed the US economy is contracting for the second consecutive quarter, a common sign of a recession.

In just four months, it has raised its benchmark key rate from near zero to a new target of 2.25 percent to 2.5 percent.

At this level, the Federal Funds rate is now in line with most officials’ estimates of a “neutral” policy institution for when inflation is at 2 percent, meaning it won’t stimulate or inhibit economic activity.

Top officials are now actively debating whether a third consecutive 0.75 percentage point rate hike is needed at the next policy meeting in September or whether the Fed can make smaller hikes at future meetings.

Fed Chairman Jay Powell said at the press conference following the July announcement that as the central bank continues to tighten monetary policy, “it will probably become appropriate to slow the pace of increases.”

Financial markets took to the comment — although Powell didn’t rule out “another unusually large gain” in September — and US stocks and other risky assets rose sharply.

The market rally has picked up steam in recent weeks, easing financial conditions for consumers and businesses and countering some of the effects of the Fed tightening.

Some members of the Federal Open Market Committee and other Fed presidents have reversed the idea that the central bank will curb its aggressive approach, instead emphasizing their commitment to pushing interest rates well into restrictive territory.

The minutes suggested that Fed officials increasingly believe job losses and an economic downturn may be needed if the US central bank is to stamp out inflation, with unemployment rising “moderate” from its current 3.5 level. percent, which is historically low.

However, many participants warned of the risk that the Fed could tighten monetary policy too aggressively, but officials still seemed concerned about too little rather than too much.

In an interview with the Financial Times last week, Mary Daly, president of the San Francisco Fed, said the central bank is “not nearly done” in its fight against inflation. She added that it needs to see clear evidence that consumer price growth is slowing significantly before considering a slowdown in the rate hike cycle.

According to the most recent inflation data, there was no increase in consumer price growth between June and July and a lower annual rate of 8.5 percent. That followed a surprisingly strong jobs report last week, which showed the US economy added 528,000 jobs in July.

Daly said she is inclined to support a half-point rate hike next month, but is “open-minded” about another 0.75 percentage point adjustment.

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