Fed Minutes suggest the central bank will cut in September- Will it be 25 or 50 bps?

The highly anticipated release of the Fed minutes from its July 30-31 meeting has finally been made public, revealing a dovish tone within the Federal Reserve.

Following the release, the CME Fed Fund Futures reflected an increase in expectations for a 50 basis point rate cut, rising to 38% from 28%. The minutes indicated that "many" participants advocated for more aggressive rate cuts, while "some" expressed concerns that such cuts could potentially reignite inflation, suggesting that the majority of central bank members were inclined toward a more dovish stance.

The minutes provide detailed insights into the Federal Reserve's views on the economy, inflation, and future monetary policy direction.

As we know, the Fed decided to maintain the federal funds rate at the current range of 5.25% to 5.5%, citing recent progress on inflation but indicating that more evidence was needed before considering a rate cut. However, the "vast majority" of participants suggested that if economic data continues to trend as expected, it would likely be appropriate to ease policy at the next meeting.

While all participants supported maintaining the policy rate within its current range during the July meeting, several noted that recent progress on inflation and rising unemployment provided a plausible case for a 25-basis-point rate cut, suggesting they could have supported such a move.

The committee observed that U.S. economic activity had continued to expand at a solid pace, although it had slowed compared to the second half of 2023. Real GDP growth was strong in the first half of the year, supported by consumer spending and business investment. However, there were signs of moderation, particularly in the labor market, where job gains had slowed, and the unemployment rate had edged higher to 4.1%.

Inflation showed further signs of easing, with the PCE price index rising at a slower pace. Core inflation, which excludes volatile food and energy prices, also decelerated. Participants noted that disinflation was broad-based across core goods, housing services, and non-housing services. Many participants expressed confidence that inflation was moving sustainably toward the Fed's 2% target, although some cautioned that inflation pressures might persist due to strong economic momentum.

The minutes emphasized the Fed's data-dependent approach, with many participants stressing the importance of monitoring incoming data before making further policy adjustments. The committee highlighted the risks of both under-tightening, which could lead to a resurgence in inflation, and over-tightening, which could unduly weaken economic activity and employment.

The labor market showed signs of rebalancing, with a slower pace of job gains and a modest rise in unemployment. Participants noted easing wage pressures, with nominal wage growth continuing to decelerate. There was also a recognition that labor market conditions had returned to levels seen before the pandemic, characterized as strong but not overheated.

While the Fed did not cut rates at this meeting, the minutes reveal that several participants believed there was a plausible case for a 25 basis point reduction, given the progress on inflation and the rise in unemployment. However, the consensus was to wait for more data before making such a decision. The discussion pointed to a possible rate cut at the next meeting, depending on the economic outlook.

In summary, the Fed remains cautious, balancing the need to ensure inflation continues to decline while also being mindful of not overly tightening financial conditions. The committee's future decisions will heavily depend on upcoming economic data, particularly on inflation and labor market conditions.