Federal Reserve officials are increasingly confident that inflation is moving toward the institution’s target of 2 percent, according to minutes from the July meeting. The minutes revealed that the “vast majority” of participants would likely support cutting interest rates in September if the data continue to favor looser monetary policy. Several participants noted that there was a “plausible case” for a rate cut at the July meeting due to progress on inflation and an increase in the unemployment rate.
However, some participants expressed concerns that easing policy too little or too late could threaten economic activity or employment. Staff economists also trimmed their growth outlook for the second half of 2024 in response to weaker-than-expected labor market indicators. Despite this, the output gap was expected to narrow, and real GDP growth was projected to rise in line with potential over the next couple of years.
Fed Chair Jerome Powell signaled that a rate cut could be discussed at the next meeting in September. He emphasized that the economy is moving closer to the point where it would be appropriate to reduce the policy rate. Powell also noted that as the Fed observes broader disinflation and dissipating upside inflation risks, policy rates would likely move down from the current level. With the Fed close to restoring price stability, there could be more focus on the job market.
The unemployment rate rose to 4.3 percent in the previous month, the highest since October 2021. This triggered the Sahm rule, a recession indicator. Ahead of the September FOMC meeting, the Fed will analyze more inflation data and another jobs report.
The FOMC minutes highlighted the importance of monitoring money markets amid the ongoing reduction of the central bank’s balance sheet. The Fed has been unwinding its holdings, including Treasury bonds, since June 2022. It is unclear whether the central bank plans to maintain its sizable balance sheet for the foreseeable future. Market watchers suggest that the composition of the balance sheet, rather than its size, could be a factor to watch.
While the financial markets were little changed following the release of the Fed minutes, U.S. Treasury yields dropped, and the U.S. Dollar Index extended its losses. The benchmark 10-year yield fell below 3.77 percent, and the index erased its year-to-date gain.
In conclusion, the minutes from the July meeting indicate that the majority of Federal Reserve officials are leaning towards a rate cut in September if the data continue to support looser monetary policy. The Fed is confident that inflation is moving towards its target, but there are concerns about the potential risks of easing policy too little or too late. The focus on the job market is likely to increase as the economy moves closer to price stability. The Fed will continue monitoring inflation data and jobs reports ahead of the September meeting. Additionally, the composition of the Fed’s balance sheet could be a factor to watch in the future.
