Stocks, Fed Minutes and Inflation: Live Economic News

Credit…Alex Brandon/Associated Press

Federal Reserve officials agreed at their last meeting that the central bank must act ‘quickly’ to bring down the fastest pace of inflation in 40 years, with most participants expecting up to three increases interest rate cuts by half a percentage point in the coming months, the minutes of the Fed’s May meeting showed.

They also discussed the possibility of raising interest rates beyond the so-called neutral rate, at which they do not support or dampen the economy, to further slow economic growth as policymakers try to combat the crisis. inflation.

Officials noted that inflationary pressures were evident across a wide range of goods and services, causing hardship for Americans by eroding their incomes and making it difficult for businesses to plan for the future. They said further supply chain disruptions from the Russian invasion of Ukraine and pandemic lockdowns in China also threatened to drive up inflation.

Their discussion underscored the urgency of the task at hand, with some officials pointing out “that persistently high inflation increases the risk that longer-term inflation expectations will become unanchored”, making it more difficult for the central bank to bring inflation back to the annual average of 2%. what the Fed is aiming for.

Officials also debated whether price pressures might start to ease. Many observed that recent economic data suggested inflation may not be worsening further, although they said it was too early to tell if it had peaked. While they said the labor market and consumer and business spending remained strong, they also expressed concern about “downside” risks to the economy “and the likelihood of a prolonged rise in oil prices.” energy and raw materials”.

The Fed raised rates by half a percentage point in May, its biggest rate hike since 2000. Officials also detailed a plan to cut the $9 trillion in central bank bonds and reported that she would continue to make the money more expensive to borrow and spend until it was obtained. inflation under control. At the May meeting, officials reiterated their intention to begin ending on June 1 a stimulus program in place since the start of the pandemic.

The Fed’s key rate is now set in a range of 0.75 to 1%.

His decision to raise rates by half a percentage point in May initially supported Wall Street, which worried about a larger 0.75 increase, as some officials had suggested. Fed Chairman Jerome H. Powell, speaking at a press conference after the May meeting, appeared to rule out such a big move, saying it was “not something the committee is actively considering. “. Investors took note of this comment and stocks rebounded.

But in the weeks that followed, Mr. Powell made it clear that economic conditions remained incredibly uncertain and that the Fed might have to expand — or shrink — depending on how things developed.

“If things go better than expected, then we’re prepared to do less,” Powell said during an interview with “Marketplace,” a radio show distributed by American Public Media. “If they are worse than expected, we are ready to do more.”

Still, at the May meeting, “most participants felt that increases of 50 basis points in the target range would likely be appropriate at the next two meetings,” according to the minutes, which were released Wednesday.

Fed officials have made clear they will do what it takes to rein in inflation, which hit 8.5% in the United States last month, the fastest 12-month pace since 1981. The Fed’s favorite measure of inflation, the personal consumption expenditure price index, is also rising, but not as quickly, climbing 6.6% in March from a year earlier.

While the Fed and many outside economists expected prices to ease as the economy reopened and supply chains returned to more normal operations, that didn’t happen. Instead, prices continued to rise, spanning categories such as food, rent and gasoline. The Covid shutdowns in China and the war in Ukraine have only exacerbated the price hikes for goods, food and fuel.

But as rates rise, the Federal Reserve will be watching closely for signs that the economy’s trajectory is starting to change. Data released on Tuesday showed new home sales fell 16.6% in April from the previous month, a sign that higher borrowing costs could cool the housing market. S&P Global surveys on Tuesday also pointed to slowing activity at services companies in the United States and elsewhere, and continued supply chain disruptions at global factories.

Data released after the May Fed meeting showed that the annual pace of price increases moderated somewhat in April, but inflation rates were still too high. The overarching question for the Fed is whether policymakers will be able to slow the economy enough to temper inflation without causing a recession, which Powell and his colleagues have repeatedly acknowledged as likely a challenge. While Fed officials have said their goal for now is to return policy to a “neutral” stance, they may have to go beyond that if conditions deteriorate, essentially dragging the economy down, rather than just releasing the gas.

Participants “noted that a restrictive policy stance may well become appropriate depending on the evolution of the economic outlook and the risks to the outlook,” according to the minutes.

“There are huge events, geopolitical events happening around the world that are going to play a very big role in the economy over the next year,” Powell said last week. “So whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.”

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