Fed officials want 'greater confidence' that U.S. inflation is cooling

Source: Financial Times

Minutes of the June meeting showed that some officials were concerned about the impact of keeping interest rates at higher levels on the labor market.

Updated on July 4, 2024 08:32 Financial Times Martin Muir, Kate Duguid

Minutes of the Federal Reserve’s most recent meeting showed that Federal Reserve officials believed that US inflation was cooling, but they still needed “greater confidence” before agreeing to cut interest rates from a 23-year high.

"Participants said a range of developments in product and labor markets supported their judgment that price pressures were muted," the minutes of the June meeting released Wednesday said.

Some rate setters also noted that retailers were cutting prices in the face of increasingly weak consumer demand.

But Federal Open Market Committee members also believed they should keep interest rates at their current level of 5.25% to 5.5% until "more information emerges that gives them greater confidence" that inflation is moving "sustainably" toward the Fed's 2% target, the minutes showed.

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

The Fed raised interest rates sharply two years ago to quell inflation that reached decades highs in 2022. Inflation fell rapidly last year, and the Fed's preferred inflation measure fell again to 2.6% in May this year. But it is still above its target.

However, the minutes also showed that some policymakers were worried that if interest rates remained at a higher level for too long, the unemployment rate might rise too quickly.

"Several participants emphasized in particular that as the labor market normalizes, further weakening demand may now produce a larger unemployment response than it did not long ago, and the recent reduction in labor demand is more reflected through the decline in job vacancies."

The Bureau of Labor Statistics will release a closely watched job market report on Friday. Economists surveyed by Bloomberg predict that 190,000 new jobs will be added in June, which will be a sharp slowdown from the previous month.

Officials said at the June meeting that they expect to cut borrowing costs only once this year, down from the three times previously predicted.

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

Traders in the futures market are currently pricing in a 70% chance of a rate cut in September - the last policy decision before the Nov. 5 presidential election. Nearly two cuts are expected before the end of the year. The Fed next meets on July 31.

Rate setters hinted in their statement after their last meeting that other factors, including the impact of two years of high interest rates on consumer demand, an easing in the labor market and an increase in supply, will help keep inflation in check further.