Federal Reserve officials shifted their stance regarding the long-awaited September interest rate cut during the July meeting, mostly agreeing that easing is appropriate if economic data meets expectations.
In support of the Federal Reserve’s goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, the central bank officials agreed to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent during the July meeting.
“The vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting,” stated the Federal Open Market Committee (FOMC) meeting minutes.
The market on Thursday fully priced in an interest rate cut by the U.S. central bank at the September meeting, with a 62 percent chance of a 25 basis point cut, according to the CME FedWatch tool.
U.S. economic landscape
The U.S. economic activity has advanced solidly so far this year but at a markedly slower pace than in the second half of 2023. Labor market conditions continued to ease. Job gains moderated and unemployment moved up further but remained low. Consumer price inflation was well below its year-earlier pace but remained high.
Consumer price inflation remained stable in June as it was at the start of the year. However, the month-over-month changes in May and June were smaller than those seen earlier in the year. Total PCE price inflation was 2.5 percent in June, and core PCE price inflation reached 2.6 percent, inching closer to the Federal Reserve’s 2 percent target.
“With regard to the outlook for inflation, participants judged that recent data had increased their confidence that inflation was moving sustainably toward 2 percent,” the statement added.
Read: Goldman Sachs lowers U.S. recession odds to 20 percent on better economic readings
Labor market conditions ease
Recent data suggested that labor market conditions had eased further, making the case for the Federal Reserve to cut rates. Average monthly nonfarm payroll gains in the second quarter were smaller than the average pace in the first quarter and during the previous year.
The unemployment rate moved up further in June to 4.1 percent while the labor force participation rate ticked up as well. The employment-to-population ratio remained steady.
Measures of nominal wages continued to decelerate. Average hourly earnings for all employees rose 3.9 percent in June, down 0.8 percentage points annually.
“Policy expectations, however measured, pointed to a first-rate cut at the September FOMC meeting, at least one more cut later in the year, and further policy easing next year,” stated the FOMC meeting minutes.
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