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Fed officials said last month they were willing to start cutting interest rates at their September meeting in the face of slowing job growth and falling inflation.
According to minutes of the July meeting released on Wednesday, an “overwhelming majority” of Fed officials said it would “likely be appropriate to ease policy at the next meeting” if economic data meets expectations.
At its July meeting, the Federal Open Market Committee again held rates steady at a high range of 5.25-5.5%, but policymakers agreed on the need to start cutting rates next month.
Since the meeting, weaker-than-expected labor market data and soft inflation readings have strengthened the case for a rate cut.
“Most participants noted that risks to the employment objective had increased somewhat, and many noted that risks to the inflation objective had decreased somewhat,” the minutes said.
The minutes also showed that some Fed officials began to worry about a further slowdown in the economy and did not want the Fed to respond too slowly.
“Some participants noted that a further gradual decline in labor market conditions could lead to a sharper deterioration. Many participants noted that reducing policy restrictions too late or too little could result in an excessive weakening of economic activity or employment,” the minutes said.
Several officials saw a “reasonable” case for a rate cut at the July meeting.
The next Fed meeting in September will be held six weeks before the U.S. presidential election.
Chairman Jay Powell, who is scheduled to speak at the central bank’s annual Jackson Hole conference this Friday, laid the groundwork for a September rate cut immediately after the July meeting, although he is looking for “some more good data” to be confident that inflation has stabilized back to 2% before initiating a policy change.
According to the minutes, U.S. central bankers noted that recent inflation data has bolstered their confidence that inflation will return to their 2% target, a key threshold before continuing to cut interest rates. They predicted that slower economic growth and the depletion of Americans’ savings would ease price pressures.
Wylie Tollette, chief investment officer at Franklin Templeton Investment Solutions, said the minutes reinforced the market’s confidence in a September rate cut. “I think the Fed minutes have confirmed that this is now very likely to happen.”
The minutes came hours after the Labor Department released its annual review showing the economy’s job gains in the year to March were much weaker than initially reported, stoking concerns about a slowing labor market.
The number of new jobs in the world’s largest economy in the 12 months ending in March is likely to be revised down by 818,000, the U.S. Bureau of Labor Statistics reported on Wednesday. The BLS data previously showed that U.S. employers added 2.9 million jobs in the 12 months from April to March 2023.
The revisions reported Wednesday are preliminary and will be completed early next year.
U.S. Treasury yields fell after the revised jobs data and held near session lows following the release of the Federal Reserve minutes, reflecting higher prices. In early afternoon trading in New York, the policy-sensitive two-year Treasury yield fell 0.09 percentage point to 3.91%, while the 10-year yield fell 0.05 percentage point to 3.77%.
Respected
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said the revised number was “at the high end of negative market estimates ahead of the event,” “but it’s not a groundbreaking result.”
He noted that the same data last year initially showed 306,000 fewer jobs than initially reported, but that number was revised again to a decrease of 187,000.
The revision comes at a time of economic tension. Consumers continue to spend as inflation retreats, but labor market weakness has stoked fears of a recession if the Fed doesn’t quickly lower borrowing costs.
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