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Federal Reserve officials last month signalled their readiness to start cutting interest rates at their September meeting in the face of slowing job growth and easing inflation.
According to minutes of their July meeting released on Wednesday, the “vast majority” of Fed officials said “it would likely be appropriate to ease policy at the next meeting” if the economic data came in as expected.
At the July meeting, the Federal Open Market Committee again held rates steady at a 23-year high of 5.25-5.5 per cent, but policymakers converged around the need to start cutting rates next month.
Since the meeting, weaker-than-expected labour market data and soft inflation data have bolstered the case for a rate cut.
“A majority of participants remarked that the risks to the employment goal had increased, and many participants noted that the risks to the inflation goal had decreased,” the record of the meeting said.
The minutes also showed that some Fed officials were becoming worried about a deeper slowdown and did not want the US central bank to be too slow in response.
“Some participants noted the risk that a further gradual easing in labour market conditions could transition to a more serious deterioration. Many participants noted that reducing policy restraint too late or too little could risk unduly weakening economic activity or employment,” the minutes said.
Several officials thought there was a “plausible” case for a cut at the July meeting.
The Fed’s next gathering in September will take place just six weeks before the US presidential election.
Chair Jay Powell, who is set to speak at the closely watched annual Jackson Hole central bank conference on Friday, had teed up a September cut immediately after the July meeting, even as he sought “more good data” to feel confident that inflation was retreating to 2 per cent before embarking on a policy pivot.
According to the minutes, US central bankers noted that the recent inflation data had increased their confidence that it was headed back to the 2 per cent target — a crucial threshold before proceeding with cuts. They projected that slowing economic growth and the depletion of Americans’ savings would ease price pressures.
The minutes had added to the market’s confidence in a cut in September, said Wylie Tollette, chief investment officer at Franklin Templeton Investment Solutions. “I think the Fed minutes have confirmed that that’s very likely to happen now.”
The release of the minutes came just hours after the US labour department released annual revisions showing jobs growth in the economy had been far weaker over the year to March than originally stated, compounding concerns about a slowing labour market.
The Bureau of Labor Statistics on Wednesday reported that the number of jobs added to the world’s largest economy in the 12 months to March was likely to be revised down by 818,000. BLS data had previously suggested US employers had added 2.9mn jobs during that 12-month period from April 2023 until March.
The revisions reported on Wednesday are preliminary and will be finalised early next year.
US government bond yields moved lower following the revised jobs data and hovered near the day’s lows after the release of the Fed minutes, reflecting rising prices. The policy-sensitive two-year yield was down 0.09 percentage points to 3.91 per cent by mid-afternoon in New York, while the 10-year yield slipped 0.05 percentage points to 3.77 per cent.
The revised figure “was on the upper-end of the negative estimates that the market had heading into the event”, said Ian Lyngen, head of US interest rate strategy at BMO Capital Markets, “but it wasn’t anything paradigm-shifting.”
He noted that the same release last year initially showed 306,000 fewer jobs than first reported, only for that figure to be revised again to a decline of 187,000.
The revisions come at a tenuous time for the economy. Consumers are still spending as inflation retreats but labour market weakness have fanned fears of recession if the Fed does not cut borrowing costs quickly enough.