Fed keep rates on hold… but moving closer to a cut

As expected, the Federal Reserve (Fed) kept rates on hold. But September looks open for a first rate cut.

The statement and Chair Powell’s press conference haven’t backed them into a corner on a rate cut in September but, assuming the inflation data continues to reassure, you could see the statement and certainly the commentary from Powell as consistent with one. I continue to forecast two Fed rate cuts this year.

First, changes in the statement [1] are consistent with them edging closer to a rate cut. Those included the more descriptive elements of the statement, for example going from “job gains have remained strong” to “job gains have moderated” and, from “Inflation…remains elevated” to “Inflation remains…somewhat elevated.” Notably, the statement also replaced: “the Committee remains highly attentive to inflation risks” to “the Committee is attentive to the risks to both sides of its dual mandate.” Although, this is language we have heard from Chair Powell for example before.

Confidence improving (in moving sustainably to 2% inflation)

Chair Powell in his opening statement, said: “We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%. The second-quarter’s inflation readings have added to our confidence, and more good data would further strengthen that confidence.” He said it was a question (now) of seeing more good data...

September open

He said he would think that a rate cut “could be on the table in the September meeting” if “we were to see, for example, inflation moving down…more or less in line with expectations, growth remains…reasonably strong and the labour market remains consistent with its current condition.” He said they were still balancing the risks of cutting too late or too early. At one point he said that “we think we don’t need to be 100% focused on inflation because of the progress we’ve made…it’s way down from where it was. The job is not done on inflation, but nonetheless we can afford to begin to dial back the restriction in our policy rate.”

Powell said that cuts were discussed at this meeting. He said that “the overall sense of the Committee… is that we are getting closer to the point at which it will be appropriate to begin to dial back restriction but we are not quite at that point yet… but there was a real discussion back and forth of what the case would be for moving at this meeting.”

Beyond September, limited guidance on the path for rates

Powell again reiterated that they will continue to make decisions meeting-by-meeting, based on how the data comes in, how the outlook evolves and the balance of risks. The path ahead for rates, he said, will depend on how the economy evolves which he later described as highly uncertain. Note though that this was not one of the quarterly meetings where a new set of participant forecasts/dot plots are published (which lends itself to talking about the path for rates).

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[1] https://www.federalreserve.gov/newsevents/pressreleases/monetary20240731a.htm