Federal Reserve officials at their July meeting moved closer to a long-awaited interest rate cut but stopped short, while signaling a September cut had become increasingly likely, minutes released Wednesday showed.
“The vast majority” of participants at the July 30-31 meeting “observed that, if the data continues to play out as expected, it would probably be appropriate to relax policy at the next meeting,” the summary said.
Markets are fully pricing in a cut in September, which would be the first since the extraordinary easing in the early days of the Covid crisis.
While all voters on the Federal Open Market Committee’s rate-setting committee voted to keep benchmark rates steady, there was a trend among an unspecified number of officials to begin easing at the July meeting rather than waiting until September.
The document stated that “several [meeting participants] noted that recent progress in inflation and increases in the unemployment rate had provided a plausible case for reducing the target range by 25 basis points at this meeting, or that they could support such a decision.”
One basis point is 0.01 percentage point, so a decrease of 25 basis points would be equivalent to a quarter of a percentage point.
In the language the Fed uses in its minutes, which do not name names or specify how many policymakers felt a particular way, “quite a few” is a relatively small number.
However, the summary made it clear that officials were confident about the direction of inflation and are ready to start easing policy if the data continues to cooperate.
Sentiment was two-fold: inflation indicators had shown that price pressures are easing significantly, while some members noted concerns about the labor market as well as the difficulties facing households, particularly those at the lower end of the income spectrum, in the current environment.
“Regarding the outlook for inflation, participants judged that recent data increased their confidence that inflation is moving steadily toward 2 percent,” the minutes said. “Nearly all panelists noted that factors that have contributed to recent deflation will likely continue to exert downward pressure on inflation in the coming months.”
In the labor market, “many” officials noted that “reported payroll gains may be overstated.”
Earlier Wednesday, the Bureau of Labor Statistics said in a preliminary revision of nonfarm payrolls numbers from April 2023 to March 2024 that earnings may have been overstated by more than 800,000.
“A majority of participants noted that risks to the employment target had increased, and many participants noted that risks to the inflation target had decreased,” the minutes said. “Some participants noted the risk that a further gradual easing of labor market conditions could turn into a more serious deterioration.”
In its statement after the meeting, the committee noted that job gains had moderated and that inflation had also “softened.” However, it chose to keep the benchmark funds rate bound, which is currently targeted at a range of 5.25%-5.50%, the highest level in 23 years.
Markets rose on the day of the Fed meeting but cratered in subsequent sessions on concerns that the central bank is moving too slowly in easing monetary policy.
The day after the meeting, the Labor Department reported an unexpected rise in jobless claims, while a separate indicator showed the manufacturing sector shrank more than expected. Things got worse when the nonfarm payrolls report for July showed just 114,000 jobs were added and another rise in the unemployment rate to 4.3 percent.
Calls for quick Fed tapering grew, with some even suggesting the central bank would make an interim move to head off concerns that the economy was sinking fast.
However, the panic was short-lived. Later data releases showed that jobless claims fell to normal historical levels, while inflation indicators showed a reduction in price pressures. Retail sales figures were also better than expected, easing concerns about consumer pressure.
More recent indicators, however, showed pressures on the labor market and traders widely expect the Fed to start cutting interest rates in September.