Mohamed El-Erian Shares 'Main Takeaways' From Fed Minutes, Says September Rate Cut 'Essentially A Done Deal'

Mohamed El-Erian, Chief Economic Advisor at Allianz, indicated a shift in the Federal Reserve’s focus towards employment, suggesting a September rate cut is almost certain.

What Happened: El-Erian highlighted “three main takeaways from the Fed minutes,” in a post on X on Wednesday. First, he noted a clear shift in the Fed's policy emphasis towards the employment component of its dual mandate. This marks a significant change in the central bank’s approach.

Secondly, El-Erian pointed out that this shift comes with increased confidence that the inflation target is now attainable. He attributed this to expectations that disinflationary factors currently in play are likely to continue exerting downward pressure on inflation in the coming months.

Lastly, El-Erian stated that a September rate cut is “essentially a done deal.” He explained that at the end of the July meeting, the vast majority of the Federal Open Market Committee supported a rate cut based on their economic expectations. Several members even saw a plausible case for a rate cut in July.

“Indeed, "several" members saw a "plausible" case for that July cut,” El-Erian wrote.

My three main takeaways from the Fed minutes:
There is a clear shift in the Fed's policy emphasis to the employment component of its dual mandate.
This shift comes with increased "confidence" that the inflation target is now attainable given expectations that the… https://t.co/CD2q4IUoC0

— Mohamed A. El-Erian (@elerianm) August 21, 2024

See Also: US Economy Adds 818,000 Fewer Jobs Than Initially Reported: Urgency For Interest Rate Cuts Grows Further

Why It MattersThe Federal Reserve’s minutes from the July meeting have solidified expectations for a rate cut in September. The minutes revealed that some participants had considered the "plausible case" for lowering rates as early as the July meeting, a sentiment echoed by Fed Chair Jerome Powell during the subsequent press conference.

Mary Daly, President of the San Francisco Federal Reserve, has also expressed support for a cautious approach to interest rate cuts, citing mounting confidence in inflation control. Daly emphasized the need for a gradual approach to adjusting borrowing costs, suggesting that the U.S. economy is not yet in a position to warrant rapid interest rate cuts.

The minutes from the July FOMC meeting indicate that policymakers are leaning toward making the first interest rate cut in over four years at the upcoming September meeting, driven by ongoing progress in curbing inflation. Several participants had provided a plausible case for reducing the target range by 25 basis points at the July meeting or supporting such a decision based on recent progress on inflation and increases in the unemployment rate.

El-Erian had previously criticized the Federal Reserve for not reducing interest rates in July, warning that the market's anticipation of a 200 basis point cut over a year is excessive. He argued that the lack of clarity about future rate cuts is causing market uncertainty.

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Federal Reserve illustration created using artificial intelligence via MidJourney.

This story was generated using Benzinga Neuro and edited by Kaustubh Bagalkote