FED OFFICIALS EXPECT AT LEAST TWO MORE HALF-POINT HIKES

After lifting the federal funds rate by a half-point early this month, members of the U.S. Federal Reserve’s Open Market Committee foresee doing the same in June and again in July, minutes of their May meeting show.

The record shows that members discussed deliberately raising rates high enough to slow economic growth in order to get control of inflation.

The officials “noted that a restrictive stance of policy may become appropriate,” according to the minutes.

The Fed has raised its rate from 0.25 to 1 percent so far this year.

Now that the committee has all but settled on two half-point rate hikes by the end of July, some are looking ahead to an equally aggressive schedule of increases beyond that.

“I will need to see several months of sustained downward monthly readings of inflation before I conclude that inflation has peaked,” Loretta Mester, president of the Federal Reserve Bank of Cleveland, said in a 13 May speech that we reported in “Fed Should Raise Key Rate a Full Point By September, Mester Says” (17 May 2022).

The Fed should peg interest rates at 3.5 percent by the end of this year, James Bullard, president of the St. Louis Fed, has urged, which would entail a half-point rate bump at every committee meeting this year.

In contrast, Patrick Harker and Charles Evans, chiefs of the Philadelphia and Chicago Fed banks, respectively, expressed optimism that the new rate increases will dent inflation enough that the Fed can raise rates less at a time after July, The Wall Street Journal reported.

Fed chair Jerome Powell struck a tough stance in a WSJ interview earlier this month.

“This is not a time for tremendously nuanced readings of inflation,” he warned. “We need to see inflation coming down in a convincing way. Until we do, we’ll keep going.”

TREND FORECAST: With global shortages of everything from lithium to corn to computer chips, inflation is unlikely to fall very far very quickly on its own—and the Fed’s incremental rate hikes are too small to have any serious effect on inflation any time soon.

While the rate of inflation will slow, it will not reverse any time soon.

We get it: the Fed is worried that too much of a rate boost will cause a recession.

However, rate hikes to whip inflation have led to recessions more often than not.

We maintain our forecast that, barring the unexpected, by the end of this year, the U.S. economy will enter a period of Dragflation, our Top 2022 Trend in which economic activity shrinks while prices keep rising.