Fed minutes to show depth of debate over a July rate cut

By Michael S. Derby and Dan Burns

WASHINGTON (Reuters) – While the focus is now on September for the start of the Federal Reserve’s interest rate cuts, at least some U.S. central bankers wanted to expand the debate about it at last month’s policy meeting.

Just how many were in that camp and how united the remaining policymakers were in viewing the Fed’s Sept. 17-18 meeting as a preferred starting point for cutting borrowing costs should become clear when the minutes of the Sept. 30 meeting -July 31 will be published on Wednesday. .

The policy-making Federal Open Market Committee ended that meeting leaving the benchmark overnight lending rate in the range of 5.25%-5.50% if it was from July 2023, but officials were of agreed to a number of key changes in policy statements that opened the door to a rate cut at their meeting next month.

That expectation was further bolstered by Fed Chairman Jerome Powell’s remarks in his post-meeting press conference when he said, “If we were to see inflation come down … more or less in line with expectations, growth remains quite strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting.”

Two days after the meeting, the Labor Department reported a sharp slowdown in wage growth in July, with the unemployment rate climbing to a post-pandemic high of 4.3 percent.

In addition to sparking a flurry of financial market volatility that briefly reflected a small chance the Fed would rush to cut interest rates ahead of its next scheduled meeting, the easing labor market indication brought out a number of Fed officials to indicate that they would be ready. to consider rate cuts in September.

“The balance of risks has shifted, so the debate about a potential rate cut in September is an appropriate one,” Minneapolis Fed President Neel Kashkari said in an interview with the Wall Street Journal that was emblematic of the shift in policymakers politics. So far, Kashkari has stressed the importance of getting inflation back to the Fed’s 2 percent target, even if that means leaving rates where they are until near the end of this year.

INDICATIONS

Officials agreed last month to several key changes to their policy statement, softening the description of inflation and saying risks to employment are now on par with rising prices — neutral language that sets the stage for rates to decreases after more than two years. of credit tightening.

But Powell, speaking at the news conference after the meeting, also said that some officials were “looking at the possibility” of the case for a rate cut even then. Still, he said, “overwhelmingly, the feeling of the Committee was not at this meeting, but as soon as the next meeting, depending on how the data comes in.”

The story continues

How that discussion is reflected in Wednesday’s minutes is crucial and could be a guide to the scale and pace of what now appears to be an imminent shift toward policy easing. Interest rate futures markets reflect a 100% probability of a rate cut next month – with the only difference of opinion being size: a quarter percentage point or half a percentage point. The odds currently favor the lower cut.

“The debate over whether to withdraw easing in July (or ease by more than 25 basis points in September) will be closely watched to assess the level of support and, more importantly, the sensitivity of the pace, including the size of the September cut, to the labor market . moderation,” wrote analysts at LH Meyer/Monetary Policy Analytics. “Now that the September debate is more about the size of the cut, less whether or not, early guidance on easing the onset could be conveyed in ‘forward’-like wording.

(Reporting by Dan Burns; Additional reporting by Howard Schneider; Editing by Paul Simao)