Fed officials worried about inflation becoming 'entrenched'

Federal Reserve officials feared that high inflation could become entrenched in the economy and concluded that they may need to push interest rates higher than already planned in order to manage that risk.

Driving the news: According to newly released minutes of a policy meeting that concluded June 15, top officials "concurred that the economic outlook warranted moving to a restrictive stance," meaning higher interest rates that curtail economic activity.

• Moreover, "they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist."

At the meeting, Fed leaders increased their target interest rate by 0.75 percentage points, the most since 1994 and more than the half-point they had signaled was likely in the weeks preceding the meeting of the Federal Open Market Committee.

State of play: New details in the minutes show the thinking that drove that pivot. In particular, the officials believed they needed to move toward higher rates in part due to "risk management" concerns.

• Many of the officials "raised the concern that longer-run inflation expectations could be beginning to drift up to levels" inconsistent with the Fed's goals.
• Many thought that there was a "significant risk ... that elevated inflation could become entrenched if the public began to question the resolve" of the Fed.
• They judged that higher rates "would be appropriate from a risk management perspective" because they would leave the Fed "in a better position to implement more restrictive policy if inflation came in higher than expected."

Moreover, the officials stressed that "clear and effective communications," along with higher rates, "would be essential in restoring price stability." That helps explain a drumbeat of speeches and interviews from the officials in recent weeks stressing their resolve in bringing inflation down.

• Fed leaders, in other words, see their job as not just slowing demand in the economy but also reinforcing to the public that the central bank will do what it takes to bring down inflation.

The officials' economic outlook was relatively gloomy. Fed staff concluded that the risks to economic activity were skewed to the downside and inflation risks skewed to the upside.

• Policymakers "saw little evidence to date of substantial improvement in supply constraints," and some judged their economic effects "were likely to persist for longer" than expected.
• Two policymakers said that housing activity had begun to slow noticeably in their regions due to higher mortgage rates.

The Fed policy committee will meet again for two days concluding July 27, in which it appears likely to raise rates by another 0.75 percentage points.