Financial Times: Federal Reserve officials hope for "greater confidence" in cooling U.S. inflation

Author: Financial Times

The minutes from the June meeting show that some officials are concerned that maintaining interest rates at a high level could impact the labor market.

Updated on July 4, 2024, 08:32 by Martin Woollard and Kate Duguid, Financial Times

The minutes from the Federal Reserve's (Fed) most recent meeting indicate that Fed officials believe U.S. inflation is cooling, but they still need "greater confidence" before agreeing to lower rates from the 23-year high.

The June meeting minutes released on Wednesday stated: "Participants noted that a range of developments in product and labor markets supported their judgment that price pressures are easing."

Some rate setters also pointed out that retailers are cutting prices in the face of weakening consumer demand.

However, the minutes show that members of the Federal Open Market Committee (FOMC) also believe they should keep rates at the current level of 5.25% to 5.5% until "more information emerges that makes them more confident" that inflation is moving "sustainably" toward the Fed's 2% target.

For months, there have been concerns that price pressures have not eased as quickly as Fed officials would like, making them reluctant to cut borrowing costs too quickly.

The Fed raised rates significantly two years ago to quell inflation, which reached decades-high levels in 2022. Inflation fell rapidly last year, and the Fed's preferred inflation measure dropped to 2.6% again in May this year. However, it remains above its target.

Nonetheless, the minutes also reveal that some decision-makers are worried that if rates remain high for too long, the unemployment rate could rise too quickly.

"Several participants specifically emphasized that as the labor market normalizes, further weakening of demand could now produce a larger unemployment response than it would have a short time ago, with recent reductions in labor demand being more reflected in a decrease in job vacancies."

The U.S. Bureau of Labor Statistics is set to release a closely watched employment market report on Friday. Economists surveyed by Bloomberg predict that 190,000 jobs were added in June, a significant slowdown compared to the previous month.

Officials indicated in the June meeting that they expect to cut borrowing costs only once this year, down from a previous forecast of three times.

Inflation and high borrowing costs have become a political issue for President Joe Biden. Polls show that voters remain dissatisfied with the cost of living in recent years and his handling of the economy.

Traders in the futures market currently expect a 70% chance of a rate cut in September—this will be the last policy decision before the presidential election on November 5. Nearly two rate cuts are expected before the end of the year. The Fed's next meeting will be held on July 31.

Rate setters hinted in their statement after the last meeting that other factors, including the impact of two years of high rates on consumer demand, a loosening labor market, and increased supply, will help further suppress inflation.