Author: Financial Times

Minutes from the June meeting show that some officials are concerned that maintaining interest rates at a high level will have an impact on the labor market.

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

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

The minutes released on Wednesday from the June meeting stated, "Participants indicated that a range of developments in the product and labor markets supported their judgment that price pressures were abating."

Some policymakers also noted that facing weakening consumer demand, retailers are cutting prices.

However, the minutes show that members of the Federal Open Market Committee (FOMC) also believe that they should maintain interest rates at the current level of 5.25% to 5.5% until "more information becomes available that would give them greater confidence" that inflation is moving "sustainably" toward the Fed's 2% target.

For several months, there has been concern 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 rates significantly two years ago to quell inflation that reached multi-decade highs in 2022. Inflation fell rapidly last year, but the Fed's preferred inflation gauge dropped back to 2.6% in May, still above its target.

However, the minutes also show that some policymakers are concerned that if interest rates remain at a high level for too long, the unemployment rate may rise too quickly.

"Several participants emphasized that further weakening in demand now, as the labor market normalizes, might elicit a larger unemployment response than it would have done not long ago, with recent reductions in labor demand being reflected more in reductions in job vacancies."

The U.S. Bureau of Labor Statistics will release a closely watched employment report on Friday. Economists surveyed by Bloomberg predict a significant slowdown in job growth in June, with an addition of 190,000 jobs compared to the previous month.

Officials at the June meeting indicated that they expect to cut borrowing costs only once this year, below the previous forecast of three times.

Inflation and high borrowing costs have become a political issue for U.S. 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 - the last policy decision before the presidential election on November 5. It is expected that there will be nearly two rate cuts before the end of the year. The next Fed meeting will be held on July 31.

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

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