WASHINGTON - US Federal Reserve officials in July were strongly leaning towards an interest rate cut at their September policy meeting and several of them would have even been willing to reduce borrowing costs immediately, according to the minutes of the July 30-31 gathering.

US central bank officials left interest rates unchanged at the Federal Open Market Committee meeting in July but opened the door to a cut at the Sept 17-18 session.

For some time, financial markets have been expecting the September meeting to kick off the reductions in the federal funds rate, which is currently set in the 5.25 per cent to 5.5 per cent range. As much as a full percentage point worth of easing is expected by the end of 2024.

At the July meeting, “the vast majority” of policymakers “observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting”, said the minutes, which were released on Aug 21.

They also noted that “many” Fed officials viewed the stance of rates to be restrictive and “a few participants” contended that amid an ongoing cooling in inflationary pressures, no change in rates would mean that monetary policy would increase the drag on economic activity.

The minutes said that while all Fed officials were on board with keeping rates steady in July, “several” policymakers said that progress on lowering inflation amid a rise in joblessness “had provided a plausible case for reducing the target range 25 basis points at this meeting or that they could have supported such a decision”.

The minutes also showed that a dwindling camp of policymakers feared a premature easing in monetary policy could restart inflation.

The case for cutting rates rests on the ebbing of price pressures back to the central bank’s 2 per cent target and increased anxiety about the state of the job market in the wake of recent data showing a rise in the unemployment rate.

The speed of the jump in the jobless rate – which bottomed at 3.4 per cent early in 2023 and has since climbed to 4.3 per cent as of July – has added urgency to the debate over rate cuts and has prompted some analysts to say that a half-percentage-point reduction in borrowing costs should be considered in September.

The minutes noted that officials see the job market as having largely returned to where it was before the Covid-19 pandemic started, and described the job market as “strong but not overheated”.

Markets showed little reaction, with stocks rising modestly and bond yields falling, as the minutes appeared to largely confirm the policy outlook traders and investors have already priced into their securities holdings. Fed funds futures were largely unchanged from before the release.

Balance of risks

The Fed’s concerns about the job market may be exacerbated by the Labour Department’s estimate on Aug 21 that 818,000 fewer payroll jobs existed in March than previously reported. The change was part of the annual benchmark revision process.

The minutes noted that a “majority” of Fed officials saw risks to the job market as having increased while risks to the inflation mandate had been reduced.

In his post-meeting press conference in July, Fed chairman Jerome Powell tipped off the likely outlook by saying: “If we do get the data that we… hope we get, then a reduction in our policy rate could be on the table at the September meeting.”

The current level of joblessness is already higher than the 4 per cent level Fed officials penciled in for 2024, in their updated economic projections in June, and the 4.2 per cent policymakers projected for the end of 2025.

Markets are likely to get an update on Mr Powell’s views on Aug 23, when he speaks at the Kansas City Fed’s annual research conference in Jackson Hole, Wyoming. Several other Fed officials are also likely to weigh in on the outlook while attending the conference. REUTERS