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Fed Members Talk Up Front-Loading Rate Hikes to Extinguish Red-Hot Inflation

Economy Jul 06, 2022 02:46PM ET
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© Reuters

By Yasin Ebrahim

Investing.com -- Federal Reserve policymakers favored front-loading larger rate hikes to rapidly move monetary policy to a restrictive stance to extinguish red-hot inflation, the Fed’s June meeting minutes showed Wednesday.

"Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist," the Fed's minutes showed. 

At the conclusion of its previous meeting on June. 15, the Federal Open Market Committee raised its benchmark rate by 0.75% to a range of 1.5% to 1.75%. It was the largest Fed rate hike in a single meeting since 1994. 

The move caught some by surprise as the Fed had previously ruled out a 0.75% hike. But following the decision, Fed Chairman Jerome Powell flagged incoming data showing inflation continuing to flirt with four-decade highs as the key drivers behind the central’s bank’s decision. 

The Fed’s handiwork, some say, has begun to have the desired impact. Tightening financial conditions have sapped aggregate demand and helped cool inflationary pressures. 

The five-year inflation breakeven rate – a key measure of inflation expectations over the next five years – fell to 2.502%, its lowest level since September 2021.        

But bringing down inflation has come at a cost: the rising risk of recession. 

After months of insisting that the economy is likely to be strong enough to withstand the pace of monetary policy tightening, the Fed appears to be accepting the growing risk of a hard landing. 

“It’s gotten harder, the pathways have gotten narrower [to deliver a soft landing],” Powell said last month. “Nonetheless, that is our aim and there are pathways to achieve that.”

Still, Fed members at the June meeting wanted to keep their options open on rate hikes for the July meeting, judging "that an increase of 50 or 75 basis points would likely be appropriate at the next meeting."

But several weeks have elapsed since the Fed's meeting, with a slew of recent weaker economic data ratcheting up recession bets.

Last week, The Federal Reserve Bank of Atlanta officially estimated the economy would slip into recession in the second quarter. It forecast GDP to slip by 2.1% in Q2, following a 1.5% decline in Q1, pointing to two quarters of negative growth, or a technical recession.    

Markets, particularly the bond market, have been pricing impending economic doom. The yield on the 2-year Treasury bond briefly jumped above the yield on the 10-year Treasury note, marking an inversion in a key part of the yield curve that usually spells trouble on the horizon for the economy.

The S&P 500 suffered its worst first-half performance since 1970, falling 20%. The U.S. bond market fell 10% and remains on track for its worst year on record.

Following the minutes, hopes, albeit slender, of a less hawkish Fed - on expectations of inflation peaking - appear to have faded as bets on a 75 basis point hike strengthened. 

Bets on the Fed hiking rates by 0.75% at the July meeting rose to above 90% from about 80% a week ago, according to Investing.com's Fed Rate Monitor Tool.

Fed Members Talk Up Front-Loading Rate Hikes to Extinguish Red-Hot Inflation
 

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Comments (34)
Jay Prakash Singh
Jay Prakash Singh Jul 07, 2022 5:35AM ET
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America kills world economy for only his own people...the bad move by America to push world country in recession ......
Jay Prakash Singh
Jay Prakash Singh Jul 07, 2022 5:35AM ET
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America kills world economy for only his own people...the bad move by America to push world country in recession ......
Jay Prakash Singh
Jay Prakash Singh Jul 07, 2022 5:35AM ET
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America kills world economy for only his own people...the bad move by America to push world country in recession ......
la popeye
la popeye Jul 06, 2022 4:50PM ET
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you remember, fed said they would act when inflation will cross 2.5 %! yes or no !?and what did they do. ? they waited, waited and waited with all excuses ....and now, run, chicken run !!
Jimmy Joseph
Jimmy Joseph Jul 06, 2022 4:50PM ET
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Jerome Powell - completely responsible, how can one think printing 5.5 trillion would have no effect
Buy And Sell
Buy And Sell Jul 06, 2022 4:38PM ET
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Wall street crash is coming soon, maybe the mayham starts in october 2022...
Erikke Evans
Erikke Jul 06, 2022 4:31PM ET
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Powell is in Joe's back pocket, hence the snails pace to raise rates...as if things aren't bad enough already. Just pull the plug Jerome so the cycle can reset. The sooner the better.
Kerry Ditto
Kerry Ditto Jul 06, 2022 4:30PM ET
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Time to say good by to stock market.
Kerry Ditto
Kerry Ditto Jul 06, 2022 4:22PM ET
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When the stock market gets a huge crash, Fed members probalby gather a celebration party.
taylor jason
taylor jason Jul 06, 2022 4:21PM ET
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another typo ridden article by https://investing.com. inflation is not at a 40 decade high, the country isn't even 40 decades old.... please hire some editors
Dave Jones
Dave Jones Jul 06, 2022 4:14PM ET
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2 and 10 year yield has been inverted for days now! Nothing brief about that!
Kerry Ditto
Kerry Ditto Jul 06, 2022 4:14PM ET
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They are well aware of the fact. That is exactly what they want. They are extremely happy about the fact.
 
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