Federal Reserve officials moved closer to the expected interest rate cut during their July meeting but decided to hold off.
They signaled that a September reduction is becoming more likely.
Minutes released Wednesday highlighted the growing consensus that a rate cut could be necessary if economic data remains consistent with expectations.
Most participants noted that should the data continue its current trend, a policy easing at the next meeting “would likely be appropriate,” the minutes revealed.
The market is now fully expecting a September rate cut, the first since the emergency measures during the early days of the Covid crisis.
While the Federal Open Market Committee (FOMC) voted unanimously to keep rates steady in July, there was a discernible push from some members to start easing sooner rather than later.
The minutes noted that several participants believed the recent progress in controlling inflation and the rise in unemployment justified a 25 basis point reduction at the July meeting.
For context, a 25 basis point cut translates to a quarter percentage point drop in the target range, a subtle yet significant move in the Fed’s strategy.
Though “several” typically implies a minority in Fed parlance, the overall tone of the minutes reflected a growing confidence among officials that inflation was cooling sufficiently to consider loosening monetary policy.
The dual concern for the Fed was clear: while inflation appeared to be under control, there were rising worries about the labor market.
Some officials pointed out the hardships faced by households, particularly those on the lower end of the income spectrum, in the current economic climate.
Participants judged that recent data had increased their confidence that inflation is moving sustainably toward 2 percent.
Almost all participants observed that the factors contributing to recent disinflation would likely continue to exert downward pressure on inflation in the coming months.
On the labor front, many officials expressed skepticism over reported payroll gains, suggesting they might be inflated.
A preliminary revision by the Bureau of Labor Statistics earlier in the day hinted that job gains from April 2023 through March 2024 might have been overstated by over 800,000.
A majority of participants remarked that risks to the employment goal had increased, while many noted that risks to the inflation goal had decreased.
Concerns were voiced that a gradual easing in labor market conditions could lead to more severe deterioration.
Despite these concerns, the Fed chose to maintain the status quo on its benchmark funds rate, which remains at a 5.25%-5.50% range, its highest level in 23 years.
The decision, while cautious, reflected the committee’s wait-and-see approach amid conflicting economic signals.
Markets initially reacted positively to the Fed’s decision but quickly soured as fears grew that the central bank might be moving too slowly to counter a slowing economy.
The day after the meeting, a spike in unemployment claims and a sharper-than-expected contraction in the manufacturing sector rattled investors further.
However, the panic was short-lived.
Subsequent data releases showed jobless claims falling back to normal levels, and inflation indicators continued to show easing price pressures.
Retail sales also outperformed expectations, calming fears of an imminent economic downturn.
Yet, recent signs of stress in the labor market have kept traders on edge, with many betting that the Fed will begin cutting rates in September.
As September approaches, the Fed’s balancing act between inflation and employment continues to unfold, with the business community and markets closely watching for any signs of a shift in policy.
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