Fed May Be Even More Wary of Inflation Than We Thought

FOMC minutes shed light on central bank’s inflation-fighting plans

Fed Chair Jerome Powell speaks at the National Association for Business Economics.
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Samuel Corum/Stringer/Getty Images

We knew the Federal Reserve recently set out to fight inflation by raising its benchmark interest rate, but now we have more insight into why—and how quickly it’s willing to do it.

Key Takeaways

  • The Federal Reserve could be even more aggressive in fighting inflation than economists previously thought, newly released minutes from a Fed meeting show.
  • The central bank’s campaign against higher prices includes raising its benchmark interest rate and shrinking its massive balance sheet.
  • Officials have indicated in recent statements that inflation is public enemy number one, but some economists fear the Fed’s moves will slow the economy too much and cause a recession.

Officials at the central bank were caught off guard about how fast consumer prices were rising and are likely to be aggressive in waging war on inflation, newly released minutes from the March 15-16 meeting of the Federal Open Market Committee (FOMC) suggested Wednesday.

Efforts to rein in inflation by the Fed—which sets the nation’s monetary policy—could be even speedier than previously expected as it continues the campaign of rate hikes it started last month, economists said. Higher rates are intended to increase all kinds of borrowing costs, discourage spending, and bring supply and demand into balance and inflation under control.

The Fed raised interest rates by 0.25% at its March meeting, but the minutes showed it might have doubled that if the potential economic impact of Russia’s invasion of Ukraine hadn’t made it concerned about crimping growth too much. The minutes also showed that officials discussed plans to shrink the Fed’s massive balance sheet—the assets such as Treasury securities it purchased to buck up the economy during the COVID-19 pandemic. The minutes suggested the paring back—which could begin as soon as next month—would come at a faster pace than when the Fed last reduced its balance sheet starting in 2017.

The Fed’s actions have wide-ranging impacts on personal finances and the fate of the broader economy. For example, hiking the benchmark interest rate by as much as 0.5 percentage points at a time in coming meetings over the next few months—as “many participants” in the March meeting thought might be appropriate—will directly impact interest rates on consumer loans that are tied to the Fed funds rate, such as car loans and credit cards. Until last month, those rates had been held near zero because the Fed was focused on stimulating the economy to keep it going amid the disruptions caused by the pandemic.

The hikes could also slow the economy in general, even to the point of causing a recession, some economists have warned lately. Fed officials, however, believe that since jobs are plentiful enough and the economy is strong enough to withstand the tough medicine, they have to move decisively against inflation, which they now see as the greater threat.

The FOMC minutes reinforced the impression that several Fed officials gave in speeches this week. Patrick Harker, president of the Philadelphia Fed, said Wednesday that “inflation is far too high” and had proven more stubborn and widespread than he and others had expected.

Inflation has been especially tough on lower-income families who must spend more of their income on necessities, Lael Brainard, a governor on the board, said in a speech Tuesday.

“All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources,” she said. “That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone.”

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