Most Federal Reserve policymakers support cutting interest rates next month, according to minutes released Wednesday afternoon from the Fed’s July 30-31 meeting, as the market eagerly anticipates the first cut in more than four years.
Fed Chairman Jerome Powell
A “vast majority” of the Federal Open Market Committee, which votes on interest rate policy changes, backs rate cuts at the panel’s September meeting should economic data continue to “come in about as expected,” the minutes showed.
Though the vote was unanimous to hold rates last month at their 5.25% to 5.5% target range, “several” FOMC officials said they would have supported a 25 basis point cut last month, indicating the central bank is ready to act.
The market reaction to the release was light — not a surprise given traders have priced in 100% odds of a September cut for weeks — but bonds and stocks held their earlier gains, with the S&P 500 set for its highest close since July 18 and 10-year Treasury yields hitting their lowest levels since Aug. 6 (lower yields indicate higher bond values).
The minutes are from a perhaps ill-timed Fed summit, as it concluded just two days before the July jobs report revealed far weaker employment growth than forecasted and far higher unemployment than anticipated, with the 4.3% unemployment rate almost a full percentage point higher than July 2023’s 3.5%. The Fed acts on a dual mandate system, to minimize inflation and to maximize employment, and with inflation improving and the job market teetering, the central bank is likely to refocus on helping the latter. The Fed first began hiking interest rates in March 2022 to combat surging inflation, raising the target federal funds rate from 0% to over 5% by last July, the level they’ve stood for the last 13 months. Rate hikes are typically effective at curbing inflation, but they are often unpopular as they can slow economic growth. Investors widely expect the Fed to cut rates at its September meeting, the first cut since March 2020 to the target federal funds rate, which only officially determines the overnight lending fees between financial institutions but heavily influences all U.S. borrowing costs.
Earlier Wednesday, the Labor Department revealed job growth was far weaker than previously reported in the 12-month period ending in March, revising nonfarm payroll expansion down by 818,000. Though that data is a product of the past and the Fed acts to help the economy moving forward, it adds to concerns about the weakening labor market, fueling the potential need for aggressive rate cuts to prevent job growth deterioration and a broader slowdown.
The next major event on the Fed calendar is the annual Jackson Hole economic symposium beginning Friday in Wyoming. Fed Chairman Jerome Powell is expected to shed light on the bank’s latest thinking on the state of the economy and its rate cut attack plan at the conclave. The Jackson Hole event typically swings financial markets significantly, like in 2022, when the Dow Jones Industrial Average tanked more than 1,000 points (3%) on the day of Powell’s Jackson Hole speech warning about the potential for higher rates for longer to curb inflation.