The Federal Reserve (Fed) reaffirmed its position that it will not rush to cut interest rates. The Feds stated that it will begin reducing rates only when it is confident that U.S. inflation is consistently declining towards the 2% target year-on-year.
However, some members emphasized the need to be ready for a swift policy response if necessary, noting signs that the U.S. labor market is slowing down more steeply than expected rather than focusing too rigidly on indicators.
The Fed stated on the 3rd in the minutes of the Federal Open Market Committee (FOMC) meeting that it is not yet confident that inflation has moderated sufficiently to justify a rate cut.
According to the minutes, participants at the FOMC meeting held on the 11th and 12th of last month concluded that it is not yet time to cut interest rates.
While they acknowledged that inflation is trending in the right direction, they noted it is not decreasing sharply enough to warrant lowering rates.
The minutes conveyed, “Participants confirmed that there needs to be favorable additional data to have more confidence that inflation is sustainably heading towards 2%.”
Some of the 19 FOMC participants expressed the opinion that interest rates should be raised further if necessary.
There were discussions of raising interest rates, but it was not a significant argument.
Instead, there was a point that more attention should be paid to the slowdown in the labor market rather than solely on data.
The emphasis was on signals indicating that the labor market was weakening faster than expected.
The minutes stated, “Most participants thought that the Fed’s monetary policy should be prepared to respond to unexpected economic vulnerabilities.”
They acknowledged that inflation has certainly turned downwards.
Furthermore, they pointed out the importance of monitoring the slowdown in U.S. wage growth, weakening corporate pricing power, and increased consumer sensitivity to price hikes. These are signals that support the forecast that inflation will continue to fall.
Some participants believed that the stable trend of the unemployment rate could be due to an increase in the influx of immigrant workers, despite an increase in new jobs in the U.S. They suggested that the labor market overheating imbalance, which has persisted for two years, is being alleviated by the increase in foreign workers.
Some senior Fed officials judged that considering these points, the increase in new employment reported in the Department of Labor’s monthly employment trends may overstate the actual trend.
According to the minutes, however, most participants were satisfied with holding off interest rate cuts.
This consensus was based on the view that the economic situation is not dire enough to warrant a cut and that inflation has not sufficiently fallen.
However, market expectations for a Fed rate cut in September have increased.
According to the CME Group FedWatch, investors judged that the likelihood of the Fed cutting interest rates at the FOMC meeting on September 17-18 was high even after the announcement of the FOMC minutes.
The probability of a 0.25% rate cut rose from 63.4% the previous day to 66.5%, while the likelihood of the rate freeze dropped from 31.2% to 27.4%.
Meanwhile, the Fed will hold the FOMC meeting on the 30th and 31st of this month ahead of the September meeting. It seems like that interest rate will certainly be frozen.
