Fed Minutes Reveal 'Plausible Case' For Interest Rate Cut As Policymakers Cheer Inflation Progress

The minutes from the July Federal Open Market Committee 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.

Although all participants agreed to maintain the federal funds rate target range at 5.25%-5.5% during the July meeting, the minutes revealed that several participants “had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision,” based on recent progress on inflation and increases in the unemployment rate.

The vast majority of participants indicated that, “if the data continued to come in about as expected, it would likely be
appropriate to ease policy at the next meeting.”

Most participants underscored the importance of maintaining clear communication about the FOMC’s data-dependent approach, emphasizing that monetary policy decisions hinge on the broader economic outlook rather than being predetermined or reliant on single data points.

Economic Outlook: Inflation Expected To Ease To 2%, But Job Market Slows

The recent disinflation was widespread across the major subcomponents of core inflation, reinforcing the FOMC’s confidence that inflation is moving sustainably toward the 2% target, according to the minutes released Wednesday.

The FOMC also observed that supply and demand conditions in the labor market are becoming more balanced. Some Fed participants warned that continued easing in labor market conditions could lead to more significant deterioration.

While upside risks to inflation have diminished, downside risks to employment have increased. The Federal Reserve has downgraded its economic growth outlook for the second half of 2024, largely due to weaker-than-expected labor market conditions.

Several participants highlighted consumer behavior changes, particularly among lower-income households that are increasingly shifting away from discretionary spending and opting for lower-cost food items and brands.

Some members emphasized the importance of monitoring the financial health of low- and moderate-income households that have exhausted their savings and are experiencing rising delinquency rates on credit cards and auto loans.

Concerns were also raised about the soundness of the banking system, with particular attention to unrealized losses on commercial real estate loans and securities, reliance on uninsured deposits and connections with nonbank financial intermediaries.

Only a few participants said an easing of financial conditions could stimulate economic activity, posing an upside risk to both economic growth and inflation.

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Illustration of Federal Reserve Chair Jerome Powell created using artificial intelligence via MidJourney.