ECN 211 Macroeconomic Principles Assignment 5 - Current News Response: 10 points

Below is a summary of the Wall Street Journal article "Inflation Fears Drove larger Fed Rate Increase in June" by Nick Timiraos, July 6, 2022.

Federal Reserve officials agreed at their meeting last month they would have to raise interest rates faster and to levels high enough to slow economic growth because of the worsening inflation picture.

Officials voted to raise their benchmark rate by 0.75 percentage point in June, the largest increase since 1994, and several officials have indicated since then that they are prepared to support another such increase at their meeting later this month. Officials last month agreed they needed to raise rates to a so called restrictive stance, high enough to slow growth, and that this would position them to lift rates to still higher levels if inflation didn't abate, according to minutes from the Fed's June 14-15 meeting, released Wednesday.

"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.

The overall tone of the minutes suggests "the Fed upgraded the inflation problem to a five-alarm fire," said Omair Sharif, an economist and head of the advisory firm Inflation Insights LLC.

As a result, the minutes also revealed officials' growing acceptance that fighting inflation might lead to higher risks of a recession, but they saw that as "a cost they're willing to pay," said Michael Feroli, chief U.S. economist at JPMorgan Chase. Since last month's meeting several Fed bank presidents and governors have endorsed a 0.75-point rate rise this month. "We're not getting traction on inflation in a way that I had hoped," said San Francisco Fed President Mary Daly in comments to reporters on June 24 explaining her support for the larger rate rise.

Stocks staged a rally after the release of the minutes, with the Dow Jones Industrial Average closing up 0.2% at 31037.68. Bond prices fell, sending up yields on the 10-year Treasury note, which closed at 2.911%, up from 2.808%% on Tuesday. The minutes showed an unusual level of agreement among the 18 officials who participate in the policy-setting meetings. All but one supported the 0.75-point increase.

Consumer prices rose 6.3% in May from a year earlier, according to the Fed's preferred gauge, the personal-consumption expenditures price index. Core prices, which exclude volatile food and energy categories, rose 4.7% in May. A separate measure, the consumer price index, has been running higher, climbing 8.6% in Maya new 40-year high.

Recent data releases have pointed to slower consumer spending and economic growth, particularly in white hot sectors of the economy that boomed last year, such as housing. Commodity and energy prices also have declined since last month's meeting, along with market-based measures of future inflation. The minutes indicated officials believed their own communications about a rapid series of rate increases had been responsible for the type of tightening in financial conditions, including higher borrowing costs for households and businesses, that they believe is necessary to damp investment and slow the broader economy. The upshot is that to the extent Fed communication has brought about recent declines in commodity prices or investors' expectations of future inflation, officials would still feel compelled to follow through on the policy steps they have signaled, even though some investors believe those same market developments could justify a less aggressive rate path.

Some economists have raised concerns that the central bank's rate-setting committee may be correcting for perceived mistakes last year in waiting too long to raise rates by moving too rapidly in the other direction now. Recent data have suggested consumer spending could be shifting away from goods, which saw extreme price increases last year, and towards services. Many economists and central bankers have hoped this transition would ease overall price pressures. But some Fed officials last month saw signs that it might instead prompt those pressures to intensify in the services sector, providing less inflation relief.

After reading the summary above, answer the following questions.

1. What if the Fed's dual mandate? 2. Define the federal funds rate. How much is the most recent Fed federal funds rate increase? (Find out from the internet.) 3. Why has the Fed been increasing the federal funds rate so much since June 2022? 4. What impact does an increase in the federal funds rate have on the aggregate demand and growth rate of GDP? 5. How does the stock market react to an increase in the interest rate by the Fed?