Fed officials preparing to lift interest rates by another 0.75 percentage point

Policy makers are leaning against full-point increase despite June inflation surge.

Fed chairman Jerome Powell has said he can’t guarantee the central bank will be able to bring down inflation without a recession. Picture: AFP

Federal Reserve officials have signalled they are likely to raise interest rates by 0.75 percentage points this month, for the second straight meeting, as part of an aggressive effort to combat high inflation.

Policymakers left the door open to a larger, full-percentage-point increase at the July 26-27 gathering. But some of them have poured cold water on the idea in recent interviews and comments.

Some officials pointed to signs that economic activity was softening as they raise rates at a historically brisk pace. “You don’t want to overdo the rate increases. A 75-basis-point hike, folks, is huge,” Fed governor Christopher Waller said.

Before last week, officials had signalled that they were leaning towards a 75-basis-point increase this month. But after another scorching inflation report last week, they indicated they would consider a full-point increase.

“We knew this inflation report was going to be ugly, and it was. It was just uglier than we thought,” Mr Waller said. But, he added, “we don’t want to make policy on one data point, and that’s kind of a critical thing”.

The Labour Department reported the consumer price index rose 9.1 per cent in June from a year before, a four-decade high, and showed inflation pressures broadening across the economy.

Demand surged last year from the reopening of the economy and aggressive government stimulus. More recently, Russia’s war against Ukraine aggravated supply chain disruptions and drove up energy and commodity prices.

Fed officials have raised interest rates at their past three meetings, beginning with a quarter-point increase in March. They followed with a half-point rise in May and a 0.75 point increase last month, the largest since 1994. The Fed hasn’t raised rates by a full percentage point since it began using the federal funds rate as its primary policy-setting tool in the early 1990s.

Moving rates up too dramatically could cause unnecessary weakness in the economy, Atlanta Fed president Raphael Bostic said on Friday at a forum hosted by the Tampa Bay Business Journal in Florida.

Other Fed officials have signalled unease with the recent ­acceleration in rate rises. “A rapid pace of rate increase brings about the risk of tightening policy more quickly than the economy and markets can adjust,” Kansas City president Esther George said.

Since the Fed raised the rate by 0.75 basis points last month, investors have responded in ways that reflect growing worries about ­recession. Oil and commodity ­prices have tumbled, and long-term bond yields have declined.

On Friday, a University of Michigan survey of consumer inflation expectations fell to its lowest level in a year, which weakened the case for a one percentage-point rate rise. Fed officials keep a close watch on expectations of ­future inflation because they believe such expectations can be self-fulfilling.

Market-based measures of ­future inflation have also drifted to their lowest levels since Russian President Vladimir Putin’s invasion of Ukraine in February.

Jay Bryson, chief economist at Wells Fargo, was among those to call for the larger rate rise last week. But on Friday he said the case had become less compelling. “It’ll be on the table, but trying to get a consensus or a super-majority to go for 100 seems a little ­ aggressive,” he said.

Officials could face more difficult decisions later this year over how much higher to push rates, ­especially if the economy shows more obvious signs of slowing, but with inflation still well above the Fed’s 2 per cent target.

Richmond Fed president Tom Barkin said last week he was ­focused on raising rates above the inflation level that investors were expecting over the next two years. “Any particular (rate change) is not nearly as important to me as the destination,” he said.

Stronger than anticipated inflation could change that destination, giving urgency to raise rates faster and higher than otherwise. St Louis Fed president James Bullard said on Friday he expected lifting the fed funds rate to just below 4 per cent by December.

With another 75 basis-point rate rise at the coming meeting, the Fed will have raised rates by as much in the past five months as its combined increases between 2015 and 2018. It would lift the rate to a range of 2.25-2.5 per cent, closer to official estimates of a neutral rate that neither stimulates nor restricts demand.

Officials are seeking to raise rates to levels that slow spending, investment and hiring by reducing demand. “They got back to neutral fast,” Mr Bryson said. “Now it’s a question of how fast do they get into restrictive territory, and how restrictive do they get.”

Economists surveyed by The Wall Street Journal this month put the chance of a recession sometime in the next 12 months at 49 per cent. Most of the 62 respondents expect the central bank to raise the fed funds rate at least above 3.25 per cent by the end of the year and to maintain it at or above that level through to the end of next year. Most expect the Fed’s first rate cut to occur by the end of 2023.

Fed chair Jerome Powell has said in recent public appearances that it will get harder for the Fed to bring down inflation without a recession if energy prices continue to rise or supply-chain bottlenecks don’t improve. Ideally, officials would slow growth enough to cool price pressures but not so much that the economy tips into a downturn.

“There’s no guarantee we can do that,” Mr Powell said. “The pathways have gotten narrower.”

The Wall Street Journal