Federal Reserve minutes confirm there is no rush to lower US interest rates

The retrospective snapshot of the Federal Reserve’s last monetary policy meeting does not provide much new information compared to what was revealed three weeks ago. The minutes of that meeting The report also reflects a certain division over how long to keep interest rates at their highest level in 23 years. In general, the message is the same one that Federal Reserve Chairman Jerome Powell has been reiterating for months: there is no rush to lower the price of money. To start the cuts, good price data alone is not enough; the central bank needs to have greater confidence that inflation is heading sustainably towards the price stability objective of 2%.

Minutes of the Federal Open Market Committee meeting (FOMC) June 11 and 12, released Wednesday, reflect that while “some” members stressed the need for patience, “several” participants specifically noted that further weakening of the labor market could lead to a further rise in unemployment. Overall, they “stressed that they did not expect it to be appropriate to lower the target range for the federal funds rate until additional information had emerged that gave them greater confidence that inflation” was on track toward their 2% target, the same idea that has been included for months in the statement of each meeting.

At that meeting, The Federal Reserve kept interest rates in the 5.25%-5.5% range, The highest in 23 years, which has been maintained since July of last year due to persistent inflation. The central bank members updated their macroeconomic projections and the median of those forecasts points to only one rate cut of 0.25 points until the end of the year, to the range of 5%-5.25%, compared to the three expected in March, although there were members who predicted two cuts and others who expected none. For 2025, the median points to rates falling one point, to 4.00%-4.25%, and in 2026 another point, to 3.00-3.25%.

Still, investors expect a first rate cut from the Federal Reserve at the last meeting of the summer, on September 17-18, According to the CME Fedwatch tool, which assigns to that scenario a probability implied by market quotes of more than two-thirds.

According to the minutes, several policymakers maintained their willingness to raise interest rates if inflation remains high, something that is also repeated meeting after meeting but does not seem to be the central scenario at all. “Participants noted the uncertainty associated with the economic outlook and how long it would be appropriate to maintain a restrictive policy,” according to the minutes. After a series of data in early 2024 that indicated a plateau in inflation growth, the outlook has begun to improve. The Federal Reserve’s preferred measure of core inflation, which excludes food and energy prices, registered its smallest increase in six months in May.

The minutes show growing caution about the labor market, as risks to meeting its employment and inflation targets have become more balanced. Although the U.S. economy continues to create jobs at a good pace, the unemployment rate has risen in recent months.

“Several participants noted that monetary policy should be prepared to respond to unexpected economic weakness. Several participants specifically stressed that, with the labor market normalizing, further weakening in demand could now trigger a stronger unemployment response than in the recent past, when lower labor demand was felt relatively more through fewer job openings,” the minutes say.

The market is eagerly awaiting June employment data, due out on Friday. Non-farm jobs are expected to be created by 190,000 jobs and the unemployment rate is expected to remain stable. In May, 272,000 jobs were created, but the unemployment rate rose to 4.0%.

The impact of migration

The impact of immigration on the labour market was also discussed during the meeting. Many participants noted that labour supply had been boosted by rising participation rates and immigration. Some noted that immigration was unlikely to continue at the pace of recent years. However, several felt that, as recent immigrants are gradually entering the labour force, earlier immigration was likely to continue to boost labour supply.

A few participants noted that labor force participation growth would now likely be limited and thus not a significant source of additional labor supply. Considering recent payrolls data, some noted that while payroll growth had remained strong, monthly employment growth consistent with labor market equilibrium might now be larger than in the past because of immigration. Several participants also suggested that the business survey might have overstated actual employment growth. The household survey has consistently underestimated employment growth over the past year.

There was also debate about the restrictive effects of monetary policy. “Some noted that the continued strength of the economy, as well as other factors, could mean that the long-term equilibrium interest rate was higher than previously assessed, in which case both the stance of monetary policy and overall financial conditions could be less restrictive than might otherwise appear,” according to the minutes.

Policymakers noted in June that the neutral long-term interest rate, which describes a monetary policy stance that neither boosts nor slows the economy, had risen to 2.8%, instead of the previous 2.6%.

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