The Federal Reserve appears poised for a long-anticipated interest rate reduction in September, according to the minutes from their July meeting, released on Wednesday. While no action was taken last month, the minutes reveal a growing consensus among officials that a rate cut is likely on the horizon.
During the July 30-31 meeting, a significant majority of Fed officials indicated that if economic data continues to meet expectations, easing monetary policy at the September meeting would be appropriate. This potential cut would mark the first reduction since the emergency measures taken during the early days of the COVID-19 pandemic.
Although all members of the Federal Open Market Committee (FOMC) voted to maintain the current benchmark rates in July, the minutes show that some officials were inclined to begin easing immediately. However, they ultimately opted to wait until September.
The minutes highlight that several participants felt recent progress in reducing inflation and a rising unemployment rate justified a 25-basis-point reduction during the July meeting, though they did not pursue this action at the time.
The Fed’s language in the minutes suggests confidence that inflation is moving towards the central bank's 2% target. Nearly all participants agreed that the factors driving recent disinflation are likely to persist in the coming months, providing a solid case for future rate cuts.
Concerns about the labor market also played a role in the discussion. Some members expressed worries about the potential for a gradual weakening in employment conditions to evolve into a more significant downturn. These concerns were amplified by a preliminary Bureau of Labor Statistics report, which suggested that nonfarm payroll gains from April 2023 to March 2024 might have been overstated by more than 800,000 jobs.
The committee’s post-meeting statement reflected a cautious stance, noting that while job growth had slowed and inflation had eased, the decision was made to hold the benchmark funds rate steady at its current range of 5.25%-5.5%, the highest level in 23 years.
Market reactions to the Fed’s decision were mixed. While stocks initially rose, they later declined amid concerns that the Fed might be moving too slowly to ease monetary policy. These fears were further fueled by data released after the meeting, including a spike in unemployment claims and weaker-than-expected manufacturing performance.
However, subsequent economic reports showed some stabilization, with jobless claims returning to more typical levels and inflation pressures continuing to ease. Retail sales data also exceeded expectations, helping to alleviate fears of an impending economic downturn.
Despite the mixed signals, traders are now largely betting on a rate cut in September as the labor market shows signs of strain.