Fed likely to cut rates in September as inflation eases, minutes show

The minutes of the Federal Open Market Committee (FOMC) meeting on July 30 and 31 show that most members believe that monetary policy easing would be appropriate if upcoming data are in line with expectations.

What happened: The Fed had previously left the key interest rate at 5.25 to 5.5 percent, the highest level in 23 years, after a period of aggressive rate hikes to combat inflation.

Fed Governor Michelle Bowman said on Tuesday that looking ahead to September, “we should consider a number of possible scenarios that could emerge with respect to monetary policy,” adding that there were “upside risks to inflation.”

Why it is important: The possible rate cut in September is a significant step after more than a year of steady rate hikes to contain inflation. This change in policy reflects Fed officials' growing confidence that inflation is now heading toward the 2% target amid mounting concerns about employment.

What is the current economic situation in the USA?

• Inflation rate: In July, U.S. consumer price inflation rose 2.9% annually, slowing slightly from the 3% increase in June. On a monthly basis, the consumer price index rose 0.2% in July, reversing the 0.1% decline in June.
• Employment data: The US economy added 114,000 jobs in July, falling short of market expectations of 176,000. Unemployment rose to 4.3% from 4.1% in June, indicating a slowdown in the labor market.

What are the reasons for the Fed's decision to lower interest rates?

Reason for the interest rate cut: Several FOMC members noted that recent progress in inflation and the rise in unemployment provided “plausible reasons” to lower the target range by 25 basis points during the July meeting.

• Fed Chairman Jerome Powell stressed during a post-meeting press conference that rising confidence in inflation control and a solid labor market could support a rate cut in September.

Economic outlook: Fed staff have revised their economic forecasts and stressed that a weaker growth outlook is to be expected for the second half of 2024 due to weaker-than-expected labor market data.

• The minutes also noted that employment risks have increased while inflation risks have decreased, a view shared by most Fed officials.

What about employment and inflation risks?

• employment: Several Fed officials expressed concern that further easing of labor market conditions could lead to a deeper downturn, potentially affecting economic activity and employment.
• inflation: Others warned that easing policy restrictions too soon could lead to a resurgence of inflationary pressures, especially if demand picks up unexpectedly.

What happens next?

The Fed's next meeting is scheduled for September 17-18. The decision to cut interest rates could be made based on the latest economic data. All eyes will be on the upcoming inflation and employment reports to assess the likelihood of this policy change.