WASHINGTON (WSN) – The Federal Reserve is showing clear signs that it will cut interest rates in September, based on the minutes from its July 30-31 meeting, which were released on Wednesday. The minutes revealed that a “vast majority” of Fed officials are leaning towards this action, with some even suggesting they would have supported a rate cut at the July meeting.
Although the Fed kept its benchmark interest rate unchanged at 5.25%-5.50% on July 31, the minutes indicated that policymakers are preparing to ease monetary policy at the September 17-18 meeting. Financial markets have anticipated this move, with expectations for up to a full percentage point reduction by the end of the year.
The minutes indicated that most officials believed that if economic data continued to align with expectations, it would be appropriate to ease policy at the next meeting. Many Fed members felt the current rate was restrictive, and some argued that maintaining rates without a cut could further dampen economic activity amid cooling inflation.
While all Fed officials agreed to hold rates steady in July, the minutes showed that several policymakers saw a potential case for a quarter-percentage-point cut in July due to progress in reducing inflation and rising joblessness. However, a few officials were concerned that easing too soon might reignite inflation.
Jamie Cox, managing partner at Harris Financial Group, commented that the Fed minutes have clearly indicated a September rate cut is likely. He noted that the Fed is adhering closely to its communication strategy to avoid surprising the markets.
As the Fed waits to see more data, analysts are already speculating about the extent of future cuts. Evercore ISI analysts suggested that it might be feasible for Fed Chair Jerome Powell to guide the Committee towards three consecutive 25-basis-point cuts by the end of the year, though they noted that a more aggressive half-percentage-point cut would require more significant weakening in the job market.
The discussion around rate cuts is influenced by recent data showing a rise in the unemployment rate, which has climbed to 4.3% from a low of 3.4% early last year. This increase has added urgency to the debate over potential rate reductions. The minutes indicated that officials see the job market as robust but not overheated, similar to its pre-pandemic state.
Markets showed a muted response to the minutes, with modest gains in stocks and a slight decrease in bond yields. Fed funds futures adjusted slightly, reflecting a reduced probability of a quarter-percentage-point cut and a slightly higher chance of a half-percentage-point reduction.
Powell had already suggested the possibility of a rate cut in September if the data supported it. The Fed’s concerns about the job market were also highlighted by a recent Labor Department estimate showing a downward revision of 818,000 payroll jobs for March, which may impact future job market dynamics.
The minutes also noted that while risks to the job market have increased, risks to inflation have lessened. Current unemployment levels are already above the Fed’s earlier projections for this year and next.
Markets will be closely watching Powell’s remarks at the Kansas City Fed’s Jackson Hole conference on Friday, where he is expected to provide further insights into the Fed’s policy outlook. Additionally, the August employment report, due in early September, will be a key factor in shaping the Fed’s decision.
