July FOMC Minutes Released
"Many Support July, Majority Advocate September Rate Cut"
Labor Dept Lowers Annual Nonfarm Job Growth by 810,000
Powell May Hint at Cut Size at Jackson Hole
A significant number of U.S. Federal Reserve (Fed) officials have expressed the need for an immediate interest rate cut at the July Federal Open Market Committee (FOMC) meeting due to concerns over a cooling labor market. Many Fed officials advocate for a pivot (policy shift) at the next meeting, making it highly likely that rate cuts will begin in September barring any surprises. Investors are closely watching whether Fed Chair Jerome Powell will hint at a 'big cut' (0.5 percentage point rate reduction) during his speech at the Jackson Hole meeting scheduled for the 23rd (local time).
FOMC Minutes: "Several Advocated July Rate Cut, Majority Support September Cut"
The July FOMC minutes released by the Fed on the 21st stated that "several officials saw recent inflation progress and rising unemployment as providing reasonable grounds to lower the target range by 25 basis points (1bp=0.01 percentage point) at this meeting or supported such a decision." This indicates that a significant number of the 19 FOMC members already believed a rate cut was necessary in July. The minutes also noted that "a broad majority judged it appropriate to ease policy at the next (September) meeting if incoming data aligned with expectations," suggesting consensus among the remaining officials on the need for a September rate cut.
The caution stemmed from concerns over slowing employment. While the focus had been solely on price stability, there was now a judgment to shift the monetary policy emphasis toward achieving full employment. Fed officials viewed the risks of rising prices and slowing employment as being at the same level. The minutes stated, "Most participants mentioned increased risks to the employment goal," and "some participants noted that if labor market conditions gradually eased further, the situation could worsen."
The July employment report released on the 2nd, two days after the FOMC meeting, rapidly spread fears of a cooling U.S. labor market and economic recession. 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 inflation risks to have declined. The minutes said, "Participants saw some additional progress toward the 2% inflation target in recent months," and "almost all assessed that factors contributing to recent disinflation (slowing inflation rate) are likely to continue exerting downward pressure on inflation over the coming months."
U.S. Employment Not Hot... Will Powell Hint at Cut Size at Jackson Hole?
Since Fed officials already judged a September rate cut appropriate at last month's meeting, a pivot next month is considered certain. Adding to this, signals that the U.S. labor market was not as hot as initially expected have strengthened investors' confidence that rate cuts are imminent. On this day, the U.S. Department of Labor revised annual (April last year to March this year) nonfarm payrolls downward by as much as 818,000 compared to previous figures. As a result, the average monthly new employment during this period dropped from 246,000 to 178,000, a decrease of 68,000. This represents a 27.6% reduction from earlier reports. This scale of downward revision in nonfarm payrolls is the largest in 15 years since 2009 (824,000).
The market is focusing not on the timing of rate cuts but on the 'pace of cuts,' awaiting Powell's speech scheduled for the 23rd. Powell will speak at the annual economic policy symposium, the Jackson Hole meeting, held from the 22nd to 24th in Wyoming. Investors expect Powell to signal a September rate cut and provide clues about the size of cuts within the year. The key issue is the cut size.
According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market fully prices in a probability of 100% that the Fed will cut rates by at least 0.25 percentage points in September. There is a 79% chance that the Fed will cut rates by at least 0.25 percentage points at all remaining FOMC meetings this year in September, November, and December, with at least one 'big cut' executed, lowering rates by more than 1 percentage point by year-end.
Wall Street expects Powell not to prematurely hint at a big cut possibility. This is because inflation indicators and employment reports for August, which will be released before the FOMC meeting on September 17-18, need to be reviewed first. Lindsey Rossner, Senior Multi-Sector Bond Manager at Goldman Sachs Asset Management, said, "Powell cannot say at Jackson Hole whether the cut will be 25bp or 50bp without information on inflation and employment," adding, "He will keep the possibility open regarding the cut size."
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