A deteriorating inflation situation and concern about lost faith in the Federal Reserve's power to make it better prompted U.S. central bank officials to rally around an outsized interest rate increase and a firm restatement of their intent to get prices under control, minutes of the June 14-15 policy meeting showed.
Data released in the days just prior to that meeting showed consumer inflation in May had accelerated to an annualized rate of 8.6%, defying the Fed's hopes that the pace of price increases had peaked in the spring.
"Participants concurred ... that the near-term inflation outlook had deteriorated since the time of the May meeting," the minutes stated, justifying last month's 0.75-percentage-point rate increase as part of a move to "restrictive" monetary policy.
With families stressed by rising food and gas prices, and no evidence Fed actions to date had begun to arrest the fastest inflation surge in 40 years, "many participants judged that a significant risk ... was that elevated inflation could become entrenched if the public began to question the resolve of the (Federal Open Market) Committee to adjust the stance of policy as warranted," according to the minutes, which were released on Wednesday.
The result was the first 0.75-percentage-point rate increase in the United States since 1994, and the promise of more to come, with participants judging that an increase of 50 or 75 basis points in the benchmark overnight interest rate would likely be appropriate at the policy meeting later this month.
The group, in a show of unanimity that has erased typical fault lines between inflation "hawks" and "doves," noted a willingness to move interest rates as high as needed to bring inflation to the Fed's 2% target, and a need to convince the public it was prepared to do so.
"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 minutes said.
Since then, Fed Chair Jerome Powell has amped up his own rhetoric, declaring last week "the clock is kind of running" on the Fed to show it could tame prices before public psychology begins to change for the worse.
There was concern at the meeting such a change was already happening, with "many participants" worried that "longer-run inflation expectations could be beginning to drift up."
'A LOT OF CHANGE'
The minutes did not mention the risk of recession outright, and in fact Fed officials said they thought data showed U.S. gross domestic product "was expanding in the current quarter," with the job market still tight.
But they acknowledged the risk that things could slide, and in particular that Fed policy could have a larger-than-anticipated impact.
Some analysts argue that may already be taking shape, noting a recent sharp drop in oil and other commodity prices, falling bond yields, and rising recession concerns.
Following the release of the minutes, one closely watched aspect of the bond market showed deepening concerns about a possible U.S. recession in coming months.
"There really has been a lot of change since they last met," said Jim Paulsen, chief investment strategist with the Leuthold Group in Minneapolis. "There's a strong message coming from the economy and the bond market and the commodity market that (Fed policy) seems to be working and maybe the Fed would want to think about slowing down."
Upcoming jobs and inflation data will further the debate, but at this point investors expect the Fed to approve another 75-basis-point rate increase at the upcoming July 26-27 meeting as the central bank continues a rapid shift in monetary policy.
Less than a year ago, officials were still pledging to keep the monetary taps wide open, with a near-zero fed funds rate and $120 billion in monthly money-creating bond purchases, until there was "substantial further progress" in the jobs market and inflation was "moderately on track" to exceed the Fed's 2% target "for some time."
Now officials are staring at a job market considered unsustainably tight - new data for May showed there are still nearly two open jobs for each unemployed person - with inflation lodged at a high level and policymakers saying they are willing to court an economy-wide recession in order to keep public expectations about inflation in check.