FOMC Minutes: "Inflation Is the Greater Risk" ... Some Warn of Labor Market Slowdown

Emphasis on Prematurity of Rate Cuts
Two Dissenting Votes at July FOMC, Divergence Over Rate Path
"Uncertainty Remains Over Timing, Magnitude, and Persistence of Tariff Impacts"

Members of the U.S. Federal Reserve (Fed) have recently expressed concerns over the slowdown in the labor market and economic uncertainty, but have generally agreed that it is still too early to cut interest rates. Despite growing fears of stagflation-a combination of rising prices and slowing economic growth-they consider inflationary pressures to remain the more significant risk factor.

Reuters Yonhap News

On August 20 (local time), the minutes of the July Federal Open Market Committee (FOMC) meeting released by the Fed stated, "Participants emphasized both the risks of rising inflation and declining employment," adding, "The majority judged that the risk of rising inflation was the greater of the two."

Previously, at the FOMC meeting held on July 30, the Fed decided to keep the benchmark interest rate unchanged at 4.25-4.5% per annum. At that time, the Fed noted that economic activity had slowed in the first half of the year, increasing uncertainty, but assessed the labor market as "robust" and inflation as "somewhat elevated."

However, the minutes also revealed internal disagreements within the Fed regarding the economic outlook and the future path of interest rates. The minutes noted, "Some viewed downside risks to employment as the most important threat," pointing to signs of cracks in the labor market and raising the need for policy support to prevent further damage. This view appears to reflect the positions of Fed Vice Chair Michelle Bowman and Fed Governor Christopher Waller, who voted against the decision to hold rates steady, advocating for a rate cut. It was the first time in 32 years that multiple dissenting votes occurred on a key rate decision at the FOMC.

The meeting also addressed the potential impact of President Donald Trump's tariff policy on prices as a major issue. There was discussion over whether tariffs would result in a one-time price increase or trigger entrenched inflation.

The minutes pointed out, "There remains considerable uncertainty about the timing, magnitude, and persistence of the impact of this year's tariff increases." The minutes also stated, "Several participants noted that, given the experience of inflation running above 2% for an extended period, if the impact of higher tariffs persists, the risk of unanchored inflation expectations increases." It was also mentioned that it would take time for the effects of tariffs to be fully reflected in consumer and service prices.

The minutes also highlighted the growing policy burden on the Fed, which must simultaneously achieve its dual mandate of price stability and full employment. The minutes stated, "If high inflation persists and the labor market outlook weakens, the Committee could face a difficult trade-off," adding, "Interest rate decisions will depend on how far each variable deviates from its target and when those gaps are expected to close."

The Fed has maintained a cautious monetary policy stance, wary of tariff-driven inflation, despite repeated calls from President Trump to cut rates. However, the July employment report, released two days after last month's FOMC meeting, showed a significant drop in nonfarm payrolls, with job figures for May and June also sharply revised downward, intensifying concerns about a slowdown in the labor market. As a result, political pressure for a rate cut has grown even stronger. The Fed is expected to make its rate decision after reviewing inflation and employment data for August, which will be released before next month's FOMC meeting.

Meanwhile, the White House is escalating its pressure for a rate cut. On this day, President Trump called for the resignation of Fed Governor Lisa Cook, alleging that she obtained a mortgage loan through false statements. This follows his previous remarks about possible dismissal and legal action against Fed Chair Jerome Powell over excessive headquarters renovation costs. As the Trump administration ramps up pressure on Fed officials across the board, concerns are mounting about the erosion of monetary policy independence.