Fed officials recognized the need to cut rates in July but waited anyway

Members of the Federal Open Market Committee (FOMC) were surprisingly candid about the need to cut interest rates in July—so much so that economists are wondering why they didn’t do so at their last meeting.

According to the minutes of the FOMC’s July 30-31 meeting, “several” Fed officials saw a “plausible case” for cutting rates by 0.25% last month.

Nevertheless, “the vast majority” of central bankers agreed that “it would likely be appropriate to ease policy at their next meeting” on Sept. 17-18, so long as inflation resumed its moderating trend.

Regarding the inflation outlook, FOMC members “judged that recent data had increased their confidence that inflation was moving sustainably toward 2%,” the minutes said.

As Creditnews reported, headline fell below 3% in July for the first time in more than three years. Other inflation metrics, such as the core Personal Consumption Expenditures index, are even lower.

With inflation cooling, “a majority of participants” observed that the balance of risk had shifted to employment after July’s dismal nonfarm payrolls report.

“Some participants noted the risk that a further gradual easing in labor market conditions could transition to a more serious deterioration,” the minutes said.

Although the Fed’s clarity on interest rates is a welcome sign to investors, economists are perplexed about why policymakers are still dragging their feet on an obvious decision.

What’s the hold-up?

Economist David Rosenberg tried to understand the central bank’s decision to delay rate cuts but admitted he was “perplexed” by the apparent contradictions.

“It truly is perplexing that the FOMC minutes could have been so dovish, and yet the Fed could decide not to cut rates at the July 30-31 meeting, though “several” participants could have been convinced,” he wrote on the X social media platform.

Whether the central bank admits it or not, “the base-case view is for sustained disinflation momentum and a further softening in the labor market,” he explained.

Despite the hold-up, Queens’ College president Mohamed El-Erian said the FOMC minutes confirmed that “A September rate cut is essentially a done deal.”

El-Erian is part of a growing camp of economists who believe that the Fed should have started cutting rates a long time ago.

Other economists, such as Wharton School professor Jeremy Siegel, believe the Fed should lower interest rates at much larger increments than the standard 0.25% reduction. In Siegel’s view, the federal funds rate should be as low as 3.5%, which means the central bank needs to play catch-up.

There’s no indication that the Fed has the appetite for jumbo-sized rate cuts. Chicago Fed President Austan Goolsbee recently told National Public Radio that a standard 0.25% cut would be appropriate next month.

Nevertheless, futures markets still suggest there’s a 25% chance of a deeper cut at the FOMC’s September meeting.