Federal Reserve Interest Rate Outlook

By Michael S. Derby and Dan Burns
WASHINGTON (Reuters)

The Federal Reserve appears to be on track for an interest rate cut in September after a “vast majority” of officials indicated such an action was likely, according to the minutes from the July 30-31 meeting of the U.S. central bank.

Released on Wednesday, the minutes showed that some policymakers would have considered reducing borrowing costs at the previous month’s meeting. The Federal Open Market Committee opted to keep its benchmark interest rate unchanged at the 5.25%-5.50% range on July 31, while also signaling a potential cut at the September 17-18 meeting.

Financial markets have prepared for the September meeting to initiate the Fed’s policy easing, with expectations that there could be up to a full percentage point in cuts by year-end.

Most officials at the July meeting believed that, “if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.” They also noted that many viewed the current rates as restrictive, and a few participants expressed that without any change in rates amid cooling inflation, monetary policy could harm economic activity.

Despite consensus in keeping rates steady, some policymakers argued that recent progress on lowering inflation, in conjunction with increased joblessness, provided a reasonable case for a quarter-percentage-point cut either in July or for upcoming meetings.

Additionally, a shrinking group of policymakers voiced concern that premature monetary easing could reignite inflation.

Jamie Cox, managing partner at Harris Financial Group, remarked that the Fed minutes confirm a September rate cut is likely, and that the Fed aims to make its meetings less of a market-moving occurrence, adhering closely to its established communication strategy.

With the Fed’s approach contingent on data, analysts are considering how aggressive future rate cuts might be as monetary easing begins. Some predict Chair Jerome Powell may steer the Committee towards three consecutive 25-basis-point cuts by year-end, though half-percentage-point cuts could happen if job market conditions worsen.

The argument for rate cuts leans on declining price pressures moving towards the Fed’s 2% target and growing concerns over the job market, highlighted by recent increases in the unemployment rate. The unemployment rate, which reached a low of 3.4% early last year, is now at 4.3% as reported last month.

The minutes indicated that officials believe the job market has largely returned to pre-COVID levels, describing it as “strong but not overheated.” Markets reacted moderately to the minutes, with modest stock increases and falling bond yields. Fed funds futures showed a slight decline in likelihood for a quarter-point cut, while the chances for a half-point reduction increased.

Powell hinted at this outlook after the July meeting when he stated that if favorable data emerges, a policy rate reduction could be considered in September.

Concerns regarding the job market may be informed by the Labor Department’s recent report estimating 818,000 fewer payroll jobs than previously recorded in March, part of its annual benchmark revision process. Fed officials are wary that reported payroll gains might be exaggerated, which could affect the necessary new positions to maintain jobless rates.

The minutes also revealed a majority view among officials that risks to the job market have increased, while inflation risks have diminished. The current jobless level surpasses the 4% target set by the Fed’s revised economic projections from June, as well as the 4.2% rate projected for next year’s end.

Markets anticipate further insights from Powell’s address at the Kansas City Fed’s annual research conference in Jackson Hole, Wyoming, on Friday. Other Fed officials are also expected to provide their perspectives on the economic outlook during this event. Another significant update regarding monetary policy is anticipated in early September with the U.S. Labor Department’s August employment report release.