Fed Minutes Signal September Rate Cut

• Federal Reserve members saw a "plausible case" for a rate cut in July and are likely to ease policy in September.
• Recent data, including falling inflation and rising unemployment, supports the case for a rate cut.The magnitude of the rate cut (25 or 50 basis points) remains uncertain, with markets pricing in a higher probability of a larger cut.

A September rate cut looks nailed on after minutes from the US Federal Reserve’s last meeting, released last night, showed many rate-setters had considered a cut in July.

Several members at the Fed’s last meeting thought there was a “plausible case” for cutting rates by 25 basis points given the progress on inflation and increases in unemployment.

“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,” the minutes said.

At the July meeting, inflation stood at three percent, while unemployment was at 4.1 percent. Since then, inflation has fallen to 2.9 percent, while unemployment has increased by 0.2 percentage points to 4.3 percent.

“The latest data will have emboldened the doves and quietened the hawks,” Ian Shepherdson, chair and chief economist at Pantheon Macroeconomics, said.

“We expect Chair Powell (on) Friday effectively to confirm the September easing,” he added. Powell will speak tomorrow at the annual Jackson Hole Symposium.

Stephen Brown, deputy chief North America economist at Capital Economics, said the minutes “confirm a September rate cut”.

For markets, the question is not whether the Federal Reserve cuts rates but whether it goes for a 25-basis-point cut or a larger 50-basis-point reduction. According to CME’s Fedwatch, there is a roughly 34 percent chance of a 50-basis-point cut.

The minutes stressed that members would make decisions based on the “totality of incoming data” rather than any particular data points.

Investors also had to digest revisions to the official labour market figures released yesterday, which showed jobs growth had been slightly weaker than expected.

The figures showed that monthly payroll gains in the year-to-March averaged 178,000, rather than 246,000, meaning over 800,000 fewer jobs had been created.

James Knightley, chief international economist at ING, said the revisions add to doubts about the quality of the data since March too. “Momentum is being lost from an even weaker position than originally thought,” he said.

The next jobs figures will be released on 6th September and will be closely scrutinised before the Fed announces its rate decision on 18th September.

By City AM 

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