July FOMC Minutes Released
"Several Officials Support July Rate Cut"
Majority Deem "September Rate Cut Appropriate"
Employment Risks Emphasized... Inflation Seen Improving
Investors Expect 1% Point Cut This Year
A significant number of U.S. Federal Reserve (Fed) officials advocated for an immediate interest rate cut at the July Federal Open Market Committee (FOMC) meeting. This reflected concerns about a cooling labor market. The majority of officials supported a rate cut at the next meeting, making it highly likely that the Fed will begin cutting rates in September barring any surprises.
The minutes of the July FOMC meeting released by the Fed on the 21st (local time) stated that "several officials saw recent progress on inflation and rising unemployment as providing a reasonable basis for lowering the target range by 25 basis points (1bp=0.01 percentage point) at this meeting or could support such a decision."
Among the 19 FOMC members, a significant number judged that a rate cut was necessary at last month's meeting. However, the minutes noted that "a broad majority judged that it would be appropriate to ease policy at the next (September) meeting if incoming data were consistent with expectations," suggesting that more officials favored a rate cut in September.
The consensus among Fed officials on the need for a rate cut was driven by concerns about a cooling labor market. Most officials viewed the risks of rising inflation and slowing employment as now being at the same level. Whereas previously the focus was solely on easing inflation, there was now a judgment that the focus of monetary policy should shift toward achieving full employment.
The minutes stated, "A majority of participants noted that the risks to the employment objective had increased," and "some participants pointed out that if labor market conditions gradually eased further, the situation could worsen."
In fact, concerns about a cooling U.S. labor market rapidly spread after the July employment report was released on the 2nd of this month, two days after the July FOMC meeting. Nonfarm payrolls increased by only 114,000 last month, and the unemployment rate jumped from 4.1% in June to 4.3%.
On the other hand, Fed officials judged that inflation risks had declined. The minutes included officials’ assessments that inflation had shown "some additional progress" toward the 2% target over recent months.
The minutes stated, "Nearly all participants assessed that factors contributing to recent disinflation (slowing inflation) were likely to continue exerting downward pressure on inflation over the coming months," and "these factors include the continued weakening of price-setting power, slowing economic growth, and the depletion of excess household savings accumulated during the COVID-19 pandemic."
With Fed officials aligned on the need for a rate cut in September, a policy pivot next month is considered certain. On the same day, the U.S. Department of Labor revised annual (April last year to March this year) nonfarm payroll figures downward by 818,000 compared to previous releases, confirming that the labor market is not as hot as expected, which further strengthens the possibility of a rate cut next month. The key issue is the size of the rate cut. The market expects to find signals about rate cuts and clues about the magnitude of cuts within the year in Fed Chair Jerome Powell’s speech at the Jackson Hole meeting scheduled for the 23rd.
Investors expect the Fed to cut rates by 1 percentage point within this year. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on this day priced in nearly a 100% probability that the Fed will cut rates by at least 0.25 percentage points in September. The probability that the Fed will implement at least one big cut (0.5 percentage point rate cut) in the remaining three FOMC meetings this year?in September, November, and December?and lower rates by more than 1 percentage point by year-end is 78.3%.
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