Minutes of the July meeting of the Federal Reserve: The vast majority of policymakers expect that a rate cut may be appropriate in September, while some believe there is a case for action as early as July

Key points:

The vast majority of Federal Reserve officials believe that if data continues to meet expectations, it may be appropriate to cut interest rates in September. This is the highlighted "golden sentence" in this meeting minutes by the "New Federal Reserve News Agency".

Almost all officials believe that before cutting rates, more information is needed to enhance confidence in the decline in inflation.

Most officials believe that risks to the employment target have increased; some say there is a risk of more severe deterioration in the labor market; due to the labor market being weaker than expected, Federal Reserve staff have lowered their economic growth expectations for the second half of this year.

Many believe that cutting rates too late or too little may excessively weaken the economy; some believe that cutting rates too early or too much may lead to a reversal of inflation from decline to rise.

Almost all officials expect inflation to continue to decline in the coming months.

The minutes mentioned that due to the likely rate cut by the Federal Reserve in September, stocks of small and medium-sized companies surged.

The meeting minutes show that at the Federal Reserve monetary policy meeting three weeks ago, policymakers were generally more confident that inflation would continue to fall to the Fed's target of 2%. The vast majority expected that a rate cut in September might be appropriate, with some even suggesting that there were reasons to cut rates last month based on the inflation and labor market environment.

The latest Federal Open Market Committee (FOMC) meeting, which ended on July 31, decided to keep the policy rate unchanged at a high level for over twenty years. The decision statement made a significant shift, no longer stating "still highly concerned about inflation risks", but instead focusing on the risks faced by the dual mandate of employment and inflation, seen as paving the way for future rate cuts. The minutes of the meeting held at the end of July, released on Wednesday, August 21, Eastern Time, stated,

At this meeting, all attending Federal Reserve policymakers supported keeping the interest rate unchanged, "however, several participants pointed out that recent progress in inflation and the rise in the unemployment rate provided reasonable grounds for lowering the target range for the federal funds rate by 25 basis points at this meeting, or in other words, they could have supported such a (rate cut) decision."

Commentary suggests that current market pricing indicates investors expect the Federal Reserve to cut rates four times this year, whereas considering the previous dot plot showing Fed officials expected only one rate cut this year, the dovish inclination of Federal Reserve policymakers reflected in these minutes is remarkable. Wall Street News previously mentioned that the updated dot plot released after the June FOMC meeting before the July meeting showed that no Fed official expected three rate cuts this year, with the median rate forecast showing a significant downgrade from three to one rate cut expected by the Fed this year.

Morgan Stanley Asset Management's Managing Director and Portfolio Manager Priya Misra commented that ultimately, the question is whether the Federal Reserve needs to take the lead and focus on the forefront. If the risk is a deterioration in the labor market, interest rate cuts should be accelerated, with several 50 basis point cuts until rates return to a neutral level, and then adjust the rate cuts more cautiously.

More information is needed to enhance inflation confidence before rate cuts "New Federal Reserve News Agency" emphasizes key points related to rate cuts in September

Meeting minutes show that when discussing the outlook for monetary policy, participants noted that U.S. economic activity is growing steadily, some progress has been made in reducing inflation, and the tightness in the labor market has eased.

" Almost all participants stated that while the inflation data is encouraging, more information is needed to enhance their confidence in inflation moving towards the FOMC's 2% target before it is appropriate to lower the federal funds rate."

The minutes then stated that participants believed that the published data enhanced their confidence that inflation is moving towards 2%, and the vast majority of participants believed that the next meeting in September may be suitable for a rate cut.

" The vast majority believe that if the data continues to be broadly in line with expectations, then easing (monetary) policy at the next meeting may be appropriate."

It is worth noting that when journalist Nick Timiraos, also known as the "New Federal Reserve News Agency," posted comments on the minutes of the Federal Reserve meeting on social media X, he specifically highlighted the above statement.

The most liked comment under Timiraos' post asked him if the "data" in this sentence refers to data revised a month later?

Furthermore, the minutes stated that many participants indicated that monetary policy remains restrictive, and they expressed a series of views on the degree of monetary tightening. A few participants pointed out that even if the nominal target range for policy rates remains unchanged, continued downward inflation itself would have a tightening effect on monetary policy.

Most participants emphasized the importance of conveying FOMC decisions based on data, and specifically emphasized that monetary policy decisions depend on economic developments, not on a preset path. Decisions are based on overall data received, not on any specific data point. Some participants emphasized the need to monitor the conditions of the money market and factors affecting reserve demand, especially in the context of the continued reduction of the Federal Reserve's balance sheet

Risks of Labor Market Deterioration and the Potential Overly Weakening of the Economy with Too Late or Too Little Rate Cuts

In the minutes, when discussing risk management considerations that may affect the outlook for monetary policy, participants emphasized the uncertainty affecting the policy outlook, such as the degree of constraints currently provided by monetary policy, the lagged effects of past and current restrictive policies on economic activity, and the extent of normalization of the economy after the disruptions caused by the COVID-19 pandemic.

The minutes stated that a majority of participants noted that risks to the Federal Reserve's goal of full employment have increased, while many participants indicated that risks to the inflation target have decreased. Some policymakers warned of the potential for a severe deterioration in the labor market, with concerns that rate cuts being too late or insufficient could impact the economy and employment, while others believed that cutting rates too early or excessively could lead to a reversal of the downward trend in inflation.

"Some participants pointed out that further gradual easing in the labor market conditions could potentially turn into a more severe deterioration. Many participants highlighted that reducing policy constraints too late or too little could overly weaken economic activity or employment. Several participants particularly emphasized the costs and challenges faced in addressing a softening once it occurs. Some participants noted that prematurely or excessively reducing policy constraints could result in a reversal of total demand recovery and inflation dynamics."

Almost All Participants Expect Inflation to Continue Declining, Staff Lower Economic Growth Expectations for the Second Half

Regarding the outlook for inflation, the minutes stated that participants believed recent data had strengthened their confidence in inflation continuing to fall back towards 2%, with almost all policymakers expecting inflation to continue declining.

" Almost all participants believe that factors leading to recent downward pressure on inflation may continue to exert downward pressure on inflation in the coming months."

Regarding the economic outlook, the minutes mentioned that due to a softer labor market, Federal Reserve staff lowered their growth expectations for the U.S. economy in the second half of this year.

"Staff lowered the growth expectations for the second half of 2024, primarily due to labor market indicators weaker than expected."

When discussing changes in the financial market situation, the minutes stated, "Due to expectations of a likely rate cut by the Federal Reserve in September, stocks of small and medium-sized companies surged, as these listed companies are more sensitive to interest rates," while stocks of large companies, especially tech giants, performed poorly.

The minutes also mentioned that ahead of the July meeting, Federal Reserve officials received second-quarter corporate earnings reports slightly above analysts' expectations, although some companies noted a softening in consumer spending