The July FOMC minutes highlighted growing concerns about labor market risks and reflected a dovish stance from the committee, JPMorgan economists said Wednesday.
The minutes from the July 30-31 meeting, which took place just before the release of the weak July labor report, showed that the committee seems more concerned with labor market vulnerabilities than with the risk of a renewed surge in inflation, despite acknowledging that current inflation remained somewhat elevated.
While only “several” members considered cutting rates by 25 basis points at the last meeting, it was evident that a “vast majority” were already inclined to support a rate cut at the upcoming September meeting. Moreover, “many” participants viewed the current policy as restrictive, JPMorgan notes, citing the minutes release.
“Participants were, just like many others, working to understand how much of the unemployment rise reported at the time of the meeting was due to rising labor supply and how that rise should be weighed against better-looking outcomes in measures like new jobless claims and layoff rates,” the bank's economists said.
This suggests that while the committee was trying to gauge the impact of increasing unemployment, they were not dismissing the magnitude of the rise.
Furthermore, there was an anticipation of potential downward revisions to payroll numbers and “several assessed that payroll gains may be lower than those needed to keep the unemployment rate constant with a flat labor force participation rate" the minutes report states.
Still, economists emphasized that the decision on whether to cut rates by 25 or 50 basis points at the September meeting heavily depends on the upcoming monthly employment report.
Separately, Citi economists said the July FOMC minutes were unsurprising but were “the clearest indication yet that a rate cut is coming in September.”
“This conviction will only have grown after another month of softer CPI inflation data and softer employment,” they added.
The August employment data is expected to play a key role in determining the size of the rate cut in September. However, the July FOMC minutes suggest that many officials might be persuaded to support a 50 basis point cut in September, which remains Citi’s base case.
Following a weaker-than-expected July jobs report, further caution emerged as the preliminary 2024 benchmark revision showed a marked downward adjustment to recent payroll growth. The March 2024 nonfarm payrolls were revised down by 818,000, marking the largest adjustment since 2009.
“While the revised monthly pattern for payrolls won’t be known until next February, these data imply around a 70k per month downward revision and suggest that job growth averaged around 170-180k per month over the year through March rather than the previously reported average of 242k,” JPMorgan said in a separate report.