The U.S. economy appears to be slowing down, according to the minutes of the Federal Reserve’s June 11-12 meeting, which were released on Wednesday. The minutes indicate that price pressures are diminishing, as evidenced by a weak May reading in the consumer price index and slow wage growth. However, Federal Reserve policymakers are not yet ready to commit to interest rate cuts, as they want to see more evidence that inflation is moving sustainably towards their 2% target.
At the time of the meeting, the personal consumption expenditures price index, which is used to set the Fed’s inflation target, had been reported at 2.7% on a year-on-year basis for the month of April. Policymakers still judged that reading to be “elevated” and representing only “modest” improvement since their last meeting.
The minutes also suggest that the Fed is in no rush to start easing, but they indicate that the central bank is undogmatic in its view of the economy and seems poised to react quickly to any coming turns in the data. If job growth slows and inflation continues to moderate, as economist Ian Shepherdson projects, the Fed may cut rates much faster than many expect, by a full 1.25 percentage points by the end of this year.
Investors broadly expect a quarter-percentage-point rate cut at the Fed’s Sept. 17-18 meeting and another one in December. The minutes also highlight the need for Fed officials to prepare the public and investors for a number of possible economic outcomes, including the risk that the job market might slow much faster than anticipated.
The minutes seem to confirm the transition towards looser monetary policy is underway, but cautiously so. The U.S. central bank will hold its next policy meeting on July 30-31, when it is expected to leave its benchmark interest rate unchanged. Policymakers will get an update on the labor market with the release of the employment report for June on July 6, the release of the CPI for June on July 11, and an initial estimate of second-quarter economic growth on July 25.
