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Fed officials signal restrictive US rates may be needed ‘for some time’

Minutes from most recent meeting show US central bank saw little sign of inflation improving

Pedestrians with recently purchased products in New York earlier this month. The Federal Reserve has been raising interest rates since March to try to cool record levels of inflation. Photograph: Gabby Jones/The New York Times

Colby Smith
Wed Aug 17 2022 - 20:29

Federal Reserve officials discussed the need to keep US interest rates at levels that restrict the US economy “for some time” in a bid to contain the highest inflation in roughly 40 years, according to an account of their most recent meeting.

Minutes from the meeting, at which the US central bank raised its benchmark policy rate by 0.75 percentage points for the second month in a row, signalled policymakers were intent on pressing ahead with tightening monetary policy despite early signs that the economy is cooling down.

Officials noted inflation had shown little sign of improving and that the “bulk” of the effect of rate rises so far had not yet had a significant effect, according to the minutes. That is likely to mean inflation stays “uncomfortably high for some time”.

Given the enormity of the inflation problem and “upside risks” to the outlook for price growth, officials backed raising interest rates to the point where they act as a drag on economic growth.

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Raising rates to such a level would allow the Fed to increase them even “further, to appropriately restrictive levels, if inflation were to run higher than expected”, the minutes noted.

After July’s rate rise, the Fed is in the throes of its most aggressive cycle of monetary tightening since 1981. The rate increase was implemented just a day before data showed the US economy contracting for a second consecutive quarter, a common marker of a recession.

In just four months, it has raised its benchmark policy rate from near zero to a target range of 2.25 per cent to 2.5 per cent.

The European Central Bank (ECB) raised rates for the euro zone by half a percentage point in July and another hike is expected in September. Euro area annual inflation is expected to be 8.9 per cent for July, well above the ECB target rate of 2 per cent. — Copyright The Financial Times Limited 2022

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