Market Analysis

Fed is accelerating its September rate reduction, according to meeting minutes

Amos Simanungkalit · 22 Aug 202410.9K Views

The Federal Reserve seems poised for an interest rate cut in September, as indicated by the minutes from the U.S. central bank’s July 30-31 meeting, where a "vast majority" of officials favored such a move. The minutes, released on Wednesday, revealed that some policymakers were even open to reducing borrowing costs at the July meeting.

During that meeting, the Federal Open Market Committee (FOMC) maintained the benchmark interest rate in the 5.25%-5.50% range but signaled the possibility of a rate cut at the upcoming September 17-18 meeting. Financial markets have been anticipating this, with expectations of up to a full percentage point reduction by year-end.

Most policymakers at the July meeting agreed that if economic data continued to meet expectations, easing policy at the next meeting would likely be appropriate. The minutes also highlighted that "many" Fed officials viewed current rates as restrictive, and "a few participants" argued that without a rate change, monetary policy could increasingly hamper economic activity amid cooling inflation pressures.

While all officials agreed to hold rates steady in July, the minutes showed that "several" policymakers believed there was a strong case for a quarter-point cut in July, or that they could have supported such a decision had it been proposed.

However, a shrinking group of policymakers cautioned that premature easing could reignite inflation. Jamie Cox, managing partner at Harris Financial Group, stated, "The Fed minutes removed all doubt about a September rate cut," adding that the Fed’s communication strategy aims to reduce the market-moving impact of its meetings.

As the Fed continues to rely on data to guide its rate decisions, analysts are already considering the scope and aggressiveness of potential cuts. Evercore ISI analysts suggested that Fed Chair Jerome Powell might guide the Committee toward three consecutive 25-basis-point cuts through the end of the year, with a "reasonably low bar" for considering half-point cuts if the job market weakens further.

The rationale for rate cuts is supported by declining inflation pressures and growing concerns about the labor market, particularly after recent data showed an increase in the unemployment rate. The jobless rate, which had dropped to 3.4% early last year, has since climbed to 4.3% as of last month, intensifying the debate over rate reductions and leading some analysts to argue for a half-point cut in September.

The minutes described the job market as "strong but not overheated," noting that it has largely returned to its pre-pandemic state. Despite this, markets reacted mildly to the release of the minutes, with stocks rising modestly and bond yields falling. Fed funds futures showed a slight decrease in the probability of a quarter-point cut in September and a slight increase in the odds of a half-point cut.

Fed Chair Powell hinted at the possible outlook after the July meeting, stating that a policy rate reduction could be on the table in September if economic data aligns with the Fed’s expectations.

Concerns about the labor market may have been reinforced by the Labor Department's recent estimate that there were 818,000 fewer payroll jobs in March than previously reported, a revision noted in the minutes. This suggests that the economy may not need to add as many new jobs each month to maintain a steady unemployment rate.

The minutes also indicated that a "majority" of Fed officials now see increased risks to the job market while perceiving reduced risks to inflation. The current unemployment rate is already above the 4% level projected by Fed officials for this year and the 4.2% forecasted for the end of next year.

Fed Chair Powell is expected to provide further insights on the monetary policy outlook during his speech at the Kansas City Fed's annual research conference in Jackson Hole, Wyoming, this Friday, where several other Fed officials are also expected to share their views. Another key moment for the policy outlook will come in early September with the release of the U.S. Labor Department’s August employment report.