By Peter Bergman (MoneyAmped.com)
If the recent good inflation trends continue, many Federal Reserve officials have signaled that it could be appropriate to begin cutting interest rates next month.
The minutes of the Fed’s July meeting revealed that most participants believed that if the data continued to align with expectations, it would be suitable to consider adjusting policy at the upcoming conference.
Significant majority of traders, approximately 63%, anticipate that the Federal Reserve will implement a reduction in interest rates in the upcoming month.
The central bank has been closely monitoring data to guide its monetary policy decisions ever since it implemented its tenth-rate hike in May of last year.
The choice to maintain rates at their current level for over a year has resulted in a shift towards a more stringent monetary policy, as the rate of inflation has continued to decrease.
As indicated in the meeting minutes, some individuals expressed support for this perspective. They highlighted the continuous decrease in inflation, emphasizing that maintaining the current policy rate range would effectively lead to a tightening of monetary policy.
Continued Deflation Anticipated
Recent economic data has boosted members’ confidence. This includes a series of convincing inflation numbers that reflect a sustained deflationary trend. These figures indicate that inflation is progressively advancing towards the desired 2% objective.
The most recent core consumption personal expenditure, also known as CPE, which is the central bank’s preferred inflation indicator, stayed unchanged at 2.6% in the twelve months leading up to June, keeping the same level as the previous month. However, it is considerably lower than the peak of 5.4% that was realized in February 2022.
In the minutes released by the Federal Reserve, it was discovered that the majority of participants highlighted the ongoing factors contributing to a reduction in inflation. Over the next several months, these variables are anticipated to continue to exist and put downward pressure on inflation.
Even as it contemplates lowering interest rates, the Federal Reserve is anticipated to continue to prioritize a data-dependent strategy. The majority of members of the Federal Reserve emphasized that it is essential to make it clear that the Fed’s decisions on monetary policy will be contingent on the economy’s ever-changing status rather than following a predefined path.
As a result of worries that the reported increases in payroll may be inflated, the Federal Reserve is now paying greater attention to the labor market.
The Federal Reserve has shifted its focus to the labor market due to changes in inflation rates. Investors have significant cause for concern over the recent statistics in this region.
According to the minutes, the participants underlined the significance of constantly monitoring these and other indicators of the labor market’s circumstances.
The July nonfarm payrolls rose by a mere 114,000, falling short of what economists had predicted at 179,000. In an unexpected turn, the unemployment rate also inched up from 4.1% to 4.3%.
The increase in the unemployment rate has caused concerns about the condition of the U.S. economy, resulting in a significant decline in high-risk investments and demands for the Federal Reserve to implement substantial interest rate reductions in the upcoming meetings. Since then, though, a series of data, including weekly jobless claims, have provided some reassurance to investors, moderating expectations for significant cuts by the Fed.
According to the minutes, Fed members dismissed the significance of the weaker payroll data, with some participants suggesting that the reported payroll gains could be exaggerated.
“Numerous” individuals, as stated in the minutes, hold the belief that the point at which employment growth matches the rate of unemployment or the number of payroll increases required to maintain a steady unemployment rate in a stagnant labor force participation rate could potentially be lower.
On Wednesday, data indicated that the reported increase in payrolls may have been exaggerated, as the Bureau of Labor Statistics made substantial downward revisions to the number of jobs created in the 12 months leading up to March.
March 2024’s employment gains were revised downward by 818,000 positions earlier in the session as the Bureau of Labor Statistics conducted its annual benchmark review of payroll data.
Although the minutes may have seemed outdated, considering recent economic and market changes, Evercore ISI stated on Wednesday that they were not as overly cautious as anticipated. Instead, they indicated that the discussion was already leaning towards supporting cuts.
