As expected, the Fed kept the funds rate range unchanged at 5.25% – 5.50%, and while the tone of the statement was less hawkish, it didn’t overtly hint that a rate cut in September was a certainty. They did make some substantive changes to the statement that indicate the focus going forward will be more on the dual mandate, and not solely on inflation.
In relation to the full employment mandate, the Fed noted that job gains “have moderated” which was a change from “remained strong” back in June. They indicated that the unemployment rate had “moved up but remains low” from “remains low.”
On inflation, they added that it remains “somewhat elevated” vs. the prior “elevated”, and “that some further progress” was made towards the 2% inflation target vs. “modest progress” in June. All softening language points out that conditions are closer to requiring a policy adjustment (i.e., rate cuts).
Perhaps the most significant change was to the economic outlook with “the Committee is attentive to risks to both sides of its dual mandate.” The prior statement was “attentive to inflation risks” without recognition of the full employment mandate. The Fed has undoubtedly noticed the increase in the unemployment rate and is cognizant of risks to a softening labor market.
Source: Bloomberg as of 07.31.2024
Futures pricing prior to the announcement had the first full 25bps rate cut at the September meeting, with the 2025 year-end rate at 4.00%, implying two cuts this year and four cuts next year. Those futures levels continue to hold.
In the June forecast, the Fed predicted core PCE (Personal Consumption Expenditures Price Index) will end 2024 at 2.8% then drop to 2.3% in 2025, and finally hitting the 2% target in 2026. PCE currently stands at 2.6%, having already dipped below the Fed’s year-end expectation, which was well cited by those proposing that the Fed should get on with rate cuts.
The recent softening in economic/labor market data is also adding to calls to cut rates sooner rather than later. We imagine the reversal in the first quarter’s inflation results is still fresh in the Fed’s mind after last year’s stretch of promising data. It does appear some of the spike earlier in the year was likely due to seasonality and one-off price increases in January.
Conclusion
In summary, the Fed delivered an as-expected meeting, recognizing the improvement in inflation during the second quarter, but still wanting to see more before committing to the first rate cut. One risk that markets are digesting is that we see recent economy/labor market softening accelerating in the interim and potentially positioning the Fed to accelerate the cutting cycle (think 50bps instead of 25bps).
While a September rate cut is very much on the table, the Fed’s statement today suggests their need to remain data-dependent. Committee members are not yet convinced by recent reports that price pressures will continue to moderate, or that labor market conditions have cooled enough to warrant an adjustment in the current policy stance. Ultimately, they are looking for confirming indications that inflation has made sustainable progress back to their 2% target.
It does appear the onus is on the data to convince policymakers not to move come September (were we to see inflation or growth heating back up). We’d feel that any further (even if minimal) progress in price pressures is likely enough to offer the justification for cutting rates.
There will be a lot riding on the July and August CPI reports as well as the next three Nonfarm Payroll numbers (first Friday of each month), as all will be released before the September 18 FOMC meeting. In our opinion, while Powell didn’t commit to it today, they will cut rates in September.
*Devils Advocate: We can’t forget about the numerous head fakes inflation has made over the last couple of years, and won’t totally discount another upward surprise that would likely catch markets off guard. While not likely, in our opinion, it’d be foolish to rule it out.
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