Fed minutes point to ‘likely’ rate cut coming in September

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, althoug post: *FED: 'VAST MAJORITY' SAW SEPTEMBER CUT AS LIKELY APPROPRIATE post: FOMC MINUTES: INFLATION EASING, SOME SUPPORT FOR A QUARTER-POINT CUT #FOMC #FederalReserve #economy post: FED MINUTES: **PARTICIPANTS VIEWED INCOMING DATA AS ENHANCING THEIR CONFIDENCE THAT INFLATION WAS MOVING TOWARD 2% OBJECTIVE **SEVERAL PARTICIPANTS SAID RECENT PROGRESS ON INFLATION AND INCREASES IN UNEMPLOYMENT RATE PROVIDED A 'PLAUSIBLE CASE' FOR A 25-BASIS-POINT RATE…