A significant majority of Federal Reserve policymakers indicated that they may consider cutting interest rates in September if the current trend of decreasing inflation continues.
According to the minutes from the Fed’s July meeting, most members agreed that if economic data continues to align with expectations, a rate cut could be appropriate in the near future.
Market sentiment appears to be in agreement, with 63% of traders predicting a rate cut next month, based on Investing.com’s Fed Rate Monitor Tool.
Since the Federal Reserve’s tenth rate hike in May of last year, the central bank has adopted a data-dependent approach to monetary policy. This strategy has led to maintaining rates at their current level for over a year, resulting in a more restrictive monetary environment as inflation gradually slows.
A small number of Fed officials supported this outlook, noting that the ongoing disinflation combined with steady nominal policy rates inherently tightens monetary policy.
Continued Deflation Expected
Recent economic indicators, particularly a series of inflation reports, have bolstered confidence among Fed members that inflation is moving toward the 2% target.
The core Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, remained at 2.6% for the 12 months through June, consistent with the previous month and significantly lower than the peak of 5.4% in February 2022.
The Fed minutes revealed that nearly all participants believe that the factors contributing to recent disinflation are likely to persist, maintaining downward pressure on inflation in the coming months.
As the Fed inches closer to potential rate cuts, it is expected to maintain its data-driven approach. Many members emphasized the importance of making it clear that future Fed policy decisions would depend on economic developments rather than following a predetermined course.
Fed Shifts Focus to Labor Market as Payroll Data Comes Under Scrutiny
While progress on inflation has been positive, the Fed’s attention is now turning toward the labor market, where recent mixed data has raised concerns among investors.
The July nonfarm payroll report showed an increase of only 114,000 jobs, falling short of economists’ expectations of 179,000, and the unemployment rate unexpectedly rose to 4.3% from 4.1%.
The rise in unemployment sparked concerns about the health of the U.S. economy, leading to a selloff in risk assets and renewed calls for more aggressive rate cuts by the Fed. However, subsequent data, including weekly jobless claims, have helped to ease investor concerns, reducing expectations for significant Fed rate cuts.
Despite the weaker payroll figures, many Fed officials believe the data may be overstated. Some members suggested that the breakeven rate of employment growth, or the number of job gains needed to maintain a stable unemployment rate, might be lower than previously thought.
Supporting this view, the Bureau of Labor Statistics recently revised down March 2024’s employment gains by 818,000 positions as part of its annual payroll data benchmark review.
Although the Fed’s minutes might seem slightly outdated due to recent economic developments, Evercore ISI noted that they were less hawkish than expected, indicating a growing consensus in favor of rate cuts.
