Federal Reserve — FOMC Statement (USA, 2024)

1 Minutes of the Federal Open Market Committee July 30 31, 2024 A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors on Tuesday, July 30, 2024, at 10:00 a.m. and continued on Wednesday, July 31, 2024, at 9:00 a.m.1 Developments in Financial Markets and Open Market Operations The manager turned first to a review of developments in financial markets. Financial conditions eased modestly over the intermeeting period, reflecting lower long-term interest rates and higher equity prices. The manager noted that current financial conditions appeared to be providing neither a headwind nor tailwind to growth. Nominal Treasury yields declined over the period, with shorter-term yields having decreased by more than longer-term yields, leading to a steepening of the yield curve. Treasury yields remained sensitive to surprises in economic data, particularly consumer price index releases and employment reports. While near-term inflation compensation fell over the intermeeting period, longer-term forward measures were little changed. Measures of inflation expectations obtained from term structure models were modestly lower. The policy rate path derived from futures prices and the modal path derived from options prices both declined over the intermeeting period and had come into closer alignment with the median of the modal responses from the Open Market Desk s Survey of Primary Dealers and Survey of Market Participants. Policy expectations, however measured, pointed to a first rate cut at the September FOMC meeting, at least one more cut later in the year, and further policy easing next year. In the equity markets, the high perceived likelihood of a September cut in the target range for the policy rate induced a notable appreciation in the stocks of firms with small and medium capitalization, which tend to be more sensitive to interest rates. Stocks of larger companies, especially those in the technology sector, underperformed. Second-quarter earnings reports received before the meeting had been slightly above analysts  expectations, although some companies noted a softening in consumer spending. 1 The Federal Open Market Committee is referenced as the  FOMC  and the  Committee  in these minutes; the Board of Governors of the Federal Reserve System is referenced as the  Board  in these minutes. 2 July 30 31, 2024 Expectations for policy rates in most advanced foreign economies (AFEs) declined, as recent data generally pointed to continued progress on inflation. Although most AFE central banks had cut their policy rates or were expected to do so soon, the manager noted that market participants continued to expect the Bank of Japan to tighten policy this year. The sudden announcement of a French election contributed to some short-term market volatility early in the intermeeting period, including a widening between yields of French and German 10-year sovereign bonds and a widening in spreads for off-the- run U.S. Treasury securities, but the effects on U.S. Treasury markets were short lived. The effective federal funds rate remained unchanged over the intermeeting period, but the manager noted that rates on repurchase agreements (repo) had edged higher, reflecting increased demand for financing Treasury securities as well as the expected effects of gradual balance sheet normalization. Use of the overnight reverse repo (ON RRP) facility declined slightly over the intermeeting period. The staff projected that ON RRP usage would decline more noticeably over the remainder of the year, particularly as issuance of Treasury bills increases. However, the manager noted that it was possible that idiosyncratic factors specific to some ON RRP participants might support ON RRP balances in the months ahead. Looking at a range of money market indicators, the manager concluded that reserves remained abundant but indicated that the staff would continue to closely monitor developments in money markets. Finally, the manager described a set of technical adjustments to the production of the Secured Overnight Financing Rate that the Federal Reserve Bank of New York had proposed in a recent public consultation. By unanimous vote, the Committee ratified the Desk s domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System s account during the intermeeting period. Staff Review of the Economic Situation The information available at the time of the meeting indicated that U.S. economic activity had advanced solidly so far this year, but at a markedly slower pace than in the second half of 2023. Labor market conditions continued to ease: Job gains moderated, and the unemployment rate moved up further but remained low. Consumer price inflation was well below its year-earlier pace but remained somewhat elevated. Consumer price inflation as measured by the 12-month change in the price index for personal consumption expenditures (PCE) was about the same in June as it was at the start of the year, though the month-over-month changes in May and June were smaller than those seen earlier in the year. Total PCE price inflation was 2.5 percent in June, and core PCE price inflation which excludes changes in energy prices and many consumer food prices was 2.6 percent. Minutes of the Federal Open Market Committee 3 Recent data suggested that labor market conditions had eased further. Average monthly nonfarm payroll gains in the second quarter were smaller than the average pace seen in the first quarter and over the previous year. The unemployment rate moved up further in June to 4.1 percent; the labor force participation rate ticked up as well, and the employment-to-population ratio was unchanged. The unemployment rate for African Americans rose in June, while the rate for Hispanics declined slightly; both rates were above that for Whites. The ratio of job vacancies to unemployment remained at 1.2 in June, about the same as its pre-pandemic level. Measures of nominal wages continued to decelerate: Average hourly earnings for all employees rose 3.9 percent over the 12 months ending in June, down 0.8 percentage point relative to a year earlier, and the 12-month change in the employment cost index of hourly compensation of private industry workers was 3.9 percent in June, down 0.6 percentage point from its year-earlier pace. According to the advance release, real gross domestic product (GDP) rose solidly in the second quarter after a modest gain in the first quarter. Over the first half of the year, GDP growth was noticeably slower than its average pace in 2023. However, real private domestic final purchases (PDFP) which comprises PCE and private fixed investment and which often provides a better signal than GDP of underlying economic momentum posted a solid second-quarter increase that was in line with its first- quarter pace and only moderately slower than its average rate of increase in 2023. As in the first quarter, net exports subtracted from U.S. GDP growth in the second quarter. Growth in real exports of goods and services remained tepid overall, as gains in exports of capital goods and consumer goods were partly offset by declines in exports of foods and industrial supplies. By contrast, real imports continued to rise at a brisk pace, driven by further increases in imports of capital goods. Foreign economic growth was estimated to have been subdued in the second quarter, held down by a sharp deceleration in economic activity in China amid ongoing property-sector woes. In Europe and Latin America, output likely expanded below its trend pace, as restrictive monetary policy continued to be a drag on activity. Recent global inflation developments were mixed. In the AFEs, headline inflation edged down in the second quarter but generally remained above target levels. In emerging market economies, headline inflation rose a touch overall, reflecting, in part, run-ups in food prices in some countries. The Bank of Canada and the Swiss National Bank cut their policy rates further, in part citing easing inflation pressures. The People s Bank of China also lowered some key policy rates amid ongoing property- sector woes and weak consumer sentiment. 4 July 30 31, 2024 Staff Review of the Financial Situation The market-implied path for the federal funds rate moved down over the intermeeting period. Options on interest rate futures suggested that market participants were placing higher odds on a larger policy easing by early 2025 than they did just before the June meeting. Consistent with the downward shift in the implied policy path, nominal Treasury yields moved down, on net, with the most pronounced declines at shorter horizons driven largely by decreases in inflation compensation. Broad stock price indexes rose slightly on net. Yield spreads on investment- and speculative-grade corporate bonds were little changed and remained at about the lowest decile of their respective historical distributions. The one-month option-implied volatility on the S&P 500 index rose moderately and was somewhat elevated by historical standards, suggesting that investors perceived some, but not outsized, risks to the economic outlook. Market-based measures of the expected paths of policy rates and sovereign bond yields in most AFEs fell notably, largely in response to declines in U.S. rates. Following the surprise announcement of parliamentary elections in France, the spread between yields of French and German 10-year sovereign bonds widened to its highest level since 2012 but then partially retraced on the outcome of no clear parliamentary