July FOMC Minutes and Labor Market Concerns

The July FOMC minutes highlighted growing concerns about labor market risks and reflected a dovish stance from the committee, according to JPMorgan economists.

The minutes from the July 30-31 meeting, held just before the weak July labor report was released, indicate that the committee is more worried about labor market vulnerabilities than the risk of renewed inflation, although they acknowledged that current inflation remains somewhat elevated.

While only “several” members considered cutting rates by 25 basis points at the last meeting, it was clear that a “vast majority” were inclined to support a rate cut at the upcoming September meeting. Furthermore, many participants viewed the current policy as restrictive, as noted by JPMorgan.

Participants were working to understand how much of the reported rise in unemployment was due to increasing labor supply, and how that should be weighed against more favorable measures like new jobless claims and layoff rates.

This suggests that the committee was trying to assess the impact of rising unemployment without downplaying its significance.

Moreover, there was anticipation of potential downward revisions to payroll numbers with several participants assessing that payroll gains may be lower than required to maintain a constant unemployment rate with flat labor force participation.

Economists indicated that the decision on whether to cut rates by 25 or 50 basis points in September heavily relies on the upcoming monthly employment report.

Citi economists remarked that the July FOMC minutes were expected yet represented “the clearest indication yet that a rate cut is coming in September.”

This sentiment is likely to strengthen following another month of soft CPI inflation data and weaker employment figures. The August employment data will play a critical role in determining the scale of the rate cut. The July FOMC minutes hint that many officials might support a 50 basis point cut in September, aligning with Citi’s base case.

After a weaker-than-expected July jobs report, caution arose as the preliminary 2024 benchmark revision revealed a significant downward adjustment to recent payroll growth, with March 2024 nonfarm payrolls revised down by 818,000 – the largest adjustment since 2009.

The revised monthly pattern of payrolls will not be clear until next February, but these data imply a monthly downward revision of around 70,000, suggesting that job growth averaged around 170-180k per month over the year through March instead of the previously reported average of 242k.