Summary:
On Wednesday, the Federal Reserve released the minutes from its July meeting, revealing that participants believe the upside risks to inflation have decreased while the downside risks to employment have increased. Many indicated that a delayed reduction in policy restrictions could weaken economic activities or result in employment being less than desirable. The majority of participants believe that a rate cut in September may be more appropriate.
The Federal Reserve published the latest minutes from the Federal Open Market Committee (FOMC) meeting on Wednesday, August 21, local time, which showed the following: The U.S. economy has progressed strongly so far this year, but at a significantly slower pace compared to the second half of 2023. Real gross domestic product (GDP) rose strongly in the second quarter after modest gains in the first quarter. However, private final domestic purchases saw a strong increase in the second quarter that matched their pace in the first quarter.
Participants assessed that supply and demand conditions in the labor market continued to achieve a better balance. The unemployment rate has risen but remains low overall, while the labor force participation rate has also increased. The employment-to-population ratio remained unchanged. Participants noted that other indicators also suggested easing labor market conditions, including a declining employment rate and a downward trend in job openings since the beginning of the year. Many participants remarked that reported wage gains might be overstated, and many assessed that wage gains may be less than what is needed to keep the unemployment rate stable with a constant labor force participation rate.
Inflation rates have declined over the past year, but they remain somewhat elevated. Members agreed that there has been some additional progress in recent months toward achieving the committee's inflation goal of 2%. Core commodity prices were relatively stable from March to June after rising in the first three months of the year. Inflation in housing services showed a notable slowdown in June.
It is also expected that both overall and core Personal Consumption Expenditures (PCE) inflation will further decline as the balance between demand and supply in the product and labor markets continues. By 2026, it is anticipated that overall and core inflation will be around 2%. Additionally, real gross domestic product (GDP) growth is projected to increase over 2025 and 2026 in line with potential, resulting in a nearly stable output gap during those years. The unemployment rate is also expected to rise slightly during the remainder of 2024 before remaining relatively unchanged in 2025 and 2026.
Participants noted a decrease in the positive risks regarding inflation prospects, while they observed an increase in the negative risks pertaining to employment. They felt that the risks to achieving both inflation and employment goals continue to move toward a better balance. The vast majority noted that if data continues to emerge as expected, it would likely be appropriate to ease policy at the next meeting. Policy forecasts indicated a reduction in interest rates for the first time at the Federal Open Market Committee meeting in September, with at least another cut expected later in the year, followed by further easing of policy next year.
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