22-8-2024 (WASHINGTON) The latest minutes from the Federal Reserve’s July policy meeting, released on 21 August, indicate a strong inclination among US central bank officials to implement an interest rate cut at their upcoming September gathering. The documents reveal that several policymakers were prepared to reduce borrowing costs immediately during the July 30-31 meeting, signalling a significant shift in the Fed’s monetary stance.
While the Federal Open Market Committee (FOMC) maintained interest rates at their current level of 5.25% to 5.5% in July, they left the door open for a potential reduction at the September 17-18 session. This aligns with financial market expectations, which have long anticipated the September meeting as the starting point for a series of rate cuts, potentially totalling a full percentage point by the close of 2024.
The minutes disclosed that “the vast majority” of policymakers believed it would “likely be appropriate to ease policy at the next meeting” if economic data continued to evolve as expected. Notably, “many” Fed officials viewed the current stance of rates as restrictive, with “a few participants” arguing that maintaining the status quo would unnecessarily hinder economic activity, given the ongoing cooling of inflationary pressures.
Perhaps most striking was the revelation that “several” policymakers were prepared to support a 25 basis point reduction in the target range during the July meeting itself. This sentiment was based on progress in curbing inflation coupled with rising unemployment figures, suggesting a growing concern about the state of the job market.
The minutes also highlighted a dwindling minority of policymakers who cautioned against premature easing, fearing it could reignite inflationary pressures. However, the overall tone of the document points to a Fed increasingly comfortable with the idea of loosening monetary policy.
Recent labour market data has added urgency to the rate cut debate. The unemployment rate, which reached a low of 3.4% in early 2023, has since climbed to 4.3% as of July. This rapid increase has prompted some analysts to advocate for a more aggressive half-percentage-point reduction in September.
Adding to these concerns, the Labour Department’s annual benchmark revision process estimated that 818,000 fewer payroll jobs existed in March than previously reported. The minutes noted that a “majority” of Fed officials now perceive increased risks to the job market, while risks to the inflation mandate have diminished.
Fed Chairman Jerome Powell’s post-meeting press conference in July hinted at this shift, stating that “a reduction in our policy rate could be on the table at the September meeting” if favourable economic data materialised.
Market reaction to the minutes’ release was muted, with stocks rising modestly and bond yields falling slightly. This suggests that the policy outlook largely aligns with current market expectations.
As the September meeting approaches, all eyes will be on Chairman Powell’s upcoming speech at the Kansas City Fed’s annual research conference in Jackson Hole, Wyoming, on 23 August. This event, along with other Fed officials’ statements, is likely to provide further insight into the central bank’s evolving stance on monetary policy.
With the current level of unemployment already surpassing the Fed’s projections for 2024 and 2025, the stage appears set for a potential shift towards more accommodative monetary policy.
