Officials with the Federal Reserve have signaled it is likely they will raise interest rates by 0.75 percentage points for the second straight meeting in an offensive move to combat soaring inflation. Policymakers have also left the door open to a more significant, full-percentage-point increase at the end of the month meeting. However, some officials tamped down the idea in recent public comments and recent interviews ahead of their pre-meeting period.
Some Fed officials pointed to some signs of softening economic activity as they continue to raise interest rates at a historically fast pace. “You don’t want to overdo the rate increases. A 75-basis-point hike, folks, is huge,” said Fed governor Christopher Waller during a recent conference. “Don’t say, ‘Because you’re not going 100, you’re not doing your job.’”
Previously, officials signaled they are leaning toward the 0.75-point, or 75-basis-point, increase at the end of July meeting. After a recent scorching inflation report, however, they indicated they might consider an increase of an entire point.
“We knew this inflation report was going to be ugly, and it was. It was just uglier than we thought,” Waller said. Additionally, he added, “we don’t want to make policy on one data point, and that’s kind of a critical thing.”
According to the Labor Department, the consumer-price index rose 9.1% in June when compared to a year prior. The increase is a new four-decade high and demonstrates spreading inflation pressures across all portions of the economy.
Increasing rates too dramatically could cause unnecessary weakness throughout the economy, said Raphael Bostic, Atlanta Fed President. Other Fed officials have also signaled unease with the recent acceleration in rate increases.
Since the Fed shocked markets with a larger increase than expected 0.75-point rate rise last month, investors have shown growing anxiousness about recession. Commodity and oil prices have fallen, while long-term bond yields have also fallen.
Complications could follow a too-high increase
A 0.75-point rate increase could allow Fed officials to signal their willingness to maintain an aggressive pace of inflation and demand to stay high or to moderate increases if they see progress in economic activity or slowing inflation.
Fed officials may need to make more complex decisions later in the year over how high to increase rates if inflation is still above the Fed’s target of 2% or the economy shows additional signs of slowing.
If inflation remains more vigorous than expected, the Fed could feel an urgency to raise rates higher and faster than otherwise. When interest rates are raised another 0.75-points in the upcoming meeting, the Fed will have raised the fed-funds rate as much in the past few months as in all combined increases between 2015 and 2018.
Jerome Powell, Fed Chairman, recently said it would become harder for the Fed to bring down inflation without causing a recession if supply-chain bottlenecks don’t improve or energy prices continue to rise. Officials ideally aim to slow growth enough to cool off inflation pressures but not so much that the economy takes a nosedive.
“There’s no guarantee we can do that,” said Powell. “The pathways have gotten narrower.”