FED was ready to cut rates in July, currently focused on Jackson Hole

The American central bank, the Federal Reserve, decided to keep historically high interest rates unchanged at its two-day meeting on July 30 and 31, but many officials expressed readiness to reduce rates at the next meeting in September if inflation continues to weaken, while some were also ready to cut rates in July. As a result, investor conviction in the market solidified that the Fed will certainly lower interest rates at the September meeting for the first time after years of tightening monetary policy.

– Several officials noted that recent progress regarding inflation and the increase in the unemployment rate is sufficient reason for a reduction of 25 basis points. The vast majority believes that if the data aligns with expectations, policy should be eased at the next meeting, ” states the minutes of the last meeting published this week.

The minutes from the meeting also emphasize that officials stated that the risks of achieving goals related to inflation and employment are now roughly equal. Fed Chairman Jerome Powell said during a press conference on July 31 that the committee is looking for ‘more data’ to ensure inflation moves towards the targeted two percent before it begins to lower rates.

Although a reduction of 25 basis points in September would mark a small adjustment towards normalization, several analysts say that the Fed must take a faster pace of reduction to ensure a soft landing for the American economy.

Before the meeting, numerous participants, including Goldman Sachs’ chief economist Jan Hatzius, former Fed Vice President Alan Blinder, and former New York Fed President William Dudley, advocated for a rate cut in July, partly due to easing employment data.

Overstated labor market data

Two days after the Fed’s meeting, a report on employment was released showing that wage growth in the non-farm sector slowed to 114,000 in July, about half the average pace in the first six months of this year. The unemployment rate rose to 4.3 percent, the highest since October 2021.

However, data from the Labor Statistics Bureau released this week shows that wage growth from March last year to March this year was likely overstated by 818,000, emphasizing the idea that the labor market is cooling more and longer than previously thought.

Policy makers noted at the July meeting that inflation has decreased and that there has been ‘some further progress’ towards the two percent target in recent months.

– Almost all participants noted that the factors contributing to the recent disinflation are likely to continue to exert pressure on inflation in the coming months, ” states the minutes reported by Bloomberg.

The consumer price index excluding food and energy rose by 0.2 percent in July, and the quarterly annual figure, signaling a short-term trend, rose only 1.6 percent, the lowest since February 2021. Therefore, Powell can point to the latest figures to demonstrate that a rate cut of a quarter point in September is unlikely to spur inflation.

The Fed Chairman is expected to speak about economic prospects on Friday at the annual symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming. Since the release of July employment and inflation data, several Fed officials have said that the time is approaching when a rate cut will be appropriate.

And while we await Powell’s speech in Jackson Hole, the question is what the Fed Chairman will address at this traditional symposium in Wyoming. The answer to that question was provided by the President of the Peterson Institute for International Economics in Washington, Adam Posen, in his column for the Financial Times.

Election-related issues

– He should clearly indicate that the stance of Fed monetary policy could change after the elections, even if he sets a rate cut in the coming weeks. Additionally, Powell should remind of the basic economic realities as well as the stagflationary effects of mass deportation of foreign workers. He should also maintain his usual speech about the unsustainability of the current fiscal trajectory, ” writes Posen.

Central bankers around the world often find themselves in a position where they must ensure a public reality check, even amid contentious elections. The fact that this is now necessary for the Fed shows the extent to which the political debate around economic policy in the U.S. has degenerated, writes Posen. As was the case with the Bank of England before Brexit or central banks in developing countries prone to high inflation, someone must remind the public of some basic truths about economic policy – while avoiding saying anything about competing parties or candidates.

– Instead of simply hoping that factors will not emerge that could prompt a policy reversal, or that a sudden change in course when inflation is already here would be politically wiser, the Fed must now begin laying the groundwork for a possible turn. Leaving the change in forecast to surprise in November, or more likely waiting until the federal budget passes Congress in March or April next year, will shock markets and households, ” concludes Posen.

Let us recall, the Fed’s September meeting, at which a quarter-point reduction in the reference interest rate from the current range of 5.25 to 5.5 percent is expected, will be the last before the presidential elections in November, and Donald Trump, the Republican presidential candidate, recently warned Powell not to lower rates before the elections in November, stating that if elected, he would allow the Fed Chairman to serve his term only if he ‘does the right thing’.

– We never use our tools to support or oppose a political party or politician or any political outcome, ” Powell said at a press conference on July 31.