Entrenched US inflation poses ‘significant risk’, Fed officials warn

Even tighter US monetary policy may be required, minutes from June meeting suggest

Top Federal Reserve officials have concluded entrenched inflation poses a “significant risk” to the US economy and fear even tighter monetary policy will be needed if price growth exceeds their expectations, according to an account of their most recent meeting.

The minutes of the June meeting, at which the Fed delivered the first 0.75 percentage point rate rise since 1994, also showed policymakers now support raising interest rates to the point at which economic activity is restrained.

“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 said.

The minutes of the of the federal open market committee, which were released on Wednesday, showed the alarm spreading through the top ranks of the US central bank over inflation, which is running at an annual pace of 8.6 per cent. The account also showed the lengths officials are willing to go to in order to ensure the price growth does not spiral even further out of control.

The Fed must decide whether to raise rates by 0.50 percentage points or 0.75 percentage points at its meeting at the end of the month, although several officials have indicated their support for the larger increase.

The minutes showed that participants increasingly recognise that their plans to tighten monetary policy will slow the pace of economic growth “for a time”. Most noted that the risks to the outlook were “skewed to the downside” given the possibility that further tightening could weigh even more on economic activity.

The minutes echoed recent comments from Fed chair Jay Powell, who has emphasised that the central bank has little room for manoeuvre as it tries to tame inflation without causing widespread job losses. – Copyright The Financial Times Limited 2022