Federal Reserve: September rate cut ‘confirmed’ after latest releases

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

“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 per cent chance of a 50 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 quite a bit 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.