A tight labor market, inflation running well above the Federal Reserve’s 2% target and a deteriorating near-term inflation outlook prompted the Federal Open Market Committee to move ahead with a 75 basis point rate-hike in June—the highest rate increase in 28 years—according to minutes released today. Looking ahead to future meetings, FOMC members noted that “an increase of 50 or 75 basis points would likely be appropriate at the next meeting.”
FOMC members noted that inflation risks “were skewed to the upside,” including ongoing supply chain issues and rising energy and commodity prices. Some members also noted that “conflicting signals” from GDP and gross domestic income have made it difficult to properly gauge the pace of economic growth. The committee identified several downside risks to economic growth, including the potential for additional tightening of financial conditions, as well as geopolitical factors such as the war in Ukraine and COVID-related lockdowns in China.
Given the current state of inflation, FOMC members noted that “moving to a restrictive stance of policy was required to meet the committee’s legislative mandate to promote maximum employment and price stability.” They also acknowledged that there was a “significant risk” 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.”