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posted by Guy M Wong alias guywong on Tuesday 5th of July 2022 10:23:25 PM Fed sees ‘more restrictive’ policy as likely if inflation fails to come down, minutes say ■ Federal Reserve officials at their June meeting said another interest rate increase of 50 or 75 basis points is likely at the July meeting, according to minutes released Wednesday. ■ Policymakers “recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the document said. Federal Reserve officials in June emphasized the need to fight inflation even if it meant slowing an economy that already appears on the brink of a recession, according to meeting minutes released Wednesday. Members said the July meeting likely also would see another 50 or 75 basis point move on top of a 75 basis point increase approved in June. A basis point is one one-hundredth of 1 percentage point. “In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives,” the minutes said. “In particular, participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting.” Raising benchmark borrowing rates by three-quarters of a percentage point in June was necessary to control cost-of-living increases running at their highest levels since 1981, central bankers said. They said they will continue to do so until inflation gets close to their 2% long-run goal. “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 document said. They acknowledged the policy tightening likely would come with a price. “Participants recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2 percent as critical to achieving maximum employment on a sustained basis,” the meeting summary stated. The move to hike rates by 75 basis points followed an unusual sequence in which policymakers appeared to have a last-minute change of heart after saying for weeks that a 50 basis point move was almost certain. Following data showing consumer prices running at an 8.6% 12-month rate and inflation expectations rising, the rate-setting Federal Open Market Committee chose the more stringent path. Fed’s resolve Officials at the June 14-15 meeting remarked that they needed to make the move to assure markets and the public that they are serious about fighting inflation. “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 stated. The document added that the moves, combined with communication regarding the stance of policy, “would be essential in restoring price stability.“ However, the approach comes with the U.S. economy on shaky ground. Gross domestic product in the first quarter fell 1.6% and is on pace to decline 2.1% in the second quarter, according to an Atlanta Fed data tracker. That would put the economy in a technical, though historically shallow, recession. “Since the last meeting, economic conditions have weakened as financial conditions have tightened. What markets want to hear now, is what the Fed has in mind if economic data releases continue to signal a deeper more serious downturn without a commensurate easing in inflation,” said Quincy Krosby, chief equity strategist at LPL Financial. Fed officials at the meeting expressed optimism about the longer-term path of the economy, though they did lower GDP forecasts sharply, to 1.7% in 2022 from a previous estimate of 2.8% in March. They noted some reports of consumer sales slowing and businesses holding back on investments due to rising costs. The war in Ukraine, ongoing supply chain bottlenecks and Covid lockdowns in China also were cited as concerns. Officials penciled in a much bigger inflation surge than before, now anticipating headline personal consumption expenditures prices to jump 5.2% this year, compared with the 4.3% previous estimate. PCE 12-month inflation was 6.3% in May. The minutes noted that risks to the outlook were skewed lower for GDP and higher for inflation as tighter policy could slow growth. The committee prioritized fighting inflation. Officials noted that the policy moves, which put the Fed’s benchmark funds rate in a range of 1.5%-1.75%, already have yielded results, tightening financial conditions and lowering some market-based inflation measures. Two such measures, which compare inflation-indexed government bonds with Treasurys, have moved to their lowest levels since autumn of 2021. The minutes noted that after a series of rate hikes, the Fed would be well positioned to evaluate the success of the moves before deciding whether to keep going. They said “more restrictive policy” could be implemented if inflation fails to come down. Officials indicated a series of increases that would take the funds rate to 3.4% this year, above the longer-run neutral rate of 2.5%. Futures markets are pricing in a possibility that the Fed will have to start cutting rates as soon as the summer of 2023. ‘Peak inflation is not here yet’: Rents continue to rise, putting pressure on would-be homebuyers. That’s bad news for the Fed. In the first half of 2022, rents increased by 5.4% nationwide, and by double-digit percentages in some major cities, Apartment List said Rents will continue to rise, contributing to inflation, until the end of the year, economists say. With home prices and mortgage rates this high, many prospective homeowners are choosing to rent longer, opting to wait it out until prices normalize. But rents are also increasing, helped along by a housing-supply shortage that’s hiking the cost of living for millions of Americans. The national median monthly asking rent even surpassed $2,000 for the first time in May, according to Redfin, That’s all feeding into inflation, the very enemy the Federal Reserve is trying to address. Shelter, including rental costs and owners’ equivalent rent, or what a homeowner could rent their property for, makes up about a third of the Consumer Price Index, a key inflation gauge. Over the first half of this year, rents have increased by 5.4% nationwide, according to a report by Apartment List. While that’s actually a slower rise than the jump in rents over the same period last year, big cities are still seeing some absurd swings in rental prices: rents in New York City, for example, are up 27% over the past year, Apartment List said. The San Jose metropolitan area, meanwhile, has seen the fastest rent growth over the last six months, while prices in Boston, Seattle — and even smaller markets like Hartford, Conn., and Providence, R.I., — are also increasing. “Rents are surging given that housing supply is still tight; plus, prices are also going through the roof,” Jennifer Lee, senior economist at BMO Capital Markets, told MarketWatch. “Given that housing, or owners’ equivalent rent, is over 20% of the CPI index, yes, that is concerning as it will add to already high inflation pressures,” she added. “Another sign that peak inflation is not here yet.” With home prices showing some signs of dropping in some overheated markets, there could be some relief to come for renters. “We find that home prices lead rental prices by at least 12 months,” Kathy Bostjancic, chief U.S. economist at Oxford Economics, told MarketWatch. “Eventually a cooling in the pace of home-price gains should lead to a cooling in rental prices — likely sometime mid-2023,” she added. Even so, inflation may continue to burn low-income people and people of color — who have already had a disproportionately hard time staying current with their housing payments during the pandemic — in the months to come. A household is considered cost burdened if they put more than 30% of their income toward rent — a reality for about 46% of renters in 2019, according to the Joint Center for Housing Studies of Harvard University. That year, lower-income renters accounted for 62% of cost-burdened households, and 86% of households that spent half or more of their income on rent. For those families, even a slight increase in rent can spell disaster, since they might not have enough financial wiggle room to make it work.

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