U.S. Federal Reserve Chairman Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs hearings examining the semiannual monetary policy report to Congress at the Capitol in Washington, D.C., July 9, 2024.
Chris Kleponis | AFP | Getty Images
This week's Fed meeting is not so much about the present, but it is likely to be very much about the future.
If all goes as expected, policymakers will keep short-term interest rates steady again, roughly where they were last year.
But with a slew of cooperative inflation data in recent months, central bankers are widely expected to lay the groundwork for a rate cut in September. The key question markets will be looking for is how aggressive they will be in releasing that data.
“Our expectation is that they will keep rates on hold,” said Michael Reynolds, vice president of investment strategy at Glen Mead. “But there will be a lot of focus on the statement (to be released after the meeting), and that may be a prelude to September being the opposite of a hike.”
Market rates now indicate an absolute certainty that the Fed will agree to its first rate cut in more than four years—when it meets on September 17-18. The central bank has held the benchmark federal funds rate in a range of 5.25% to 5.5% for the past year. The rate represents the fees that banks charge each other for overnight lending, but it also serves as a guide for a range of other consumer-debt products.
As for this week’s meeting, which concludes on Wednesday, traders are pricing in a very slim chance of a rate cut. However, there are expectations that the rate-setting Federal Open Market Committee will drop signals that as long as there are no major data hiccups, a move in September is very likely.
Reynolds believes the committee, along with Chairman Jerome Powell at his press conference, will want to keep its options at least somewhat open.
“They want to strike a balance. They don't want investors to start pricing in a rate cut in September, and there's absolutely nothing else that could happen,” he said.
“Opening the door to a rate cut is probably the most convenient thing for them at this point,” Reynolds added. “But the markets are already excited about this, and they’re pricing it in at close to 100 percent probability. So the Fed doesn’t have to do much to change the narrative on this at all. I think if they just fine-tune the statement, it’ll get the job done.”
Expectations of relief
Glenmede expects the Fed to cut rates at each of its three remaining meetings in September. That’s broadly in line with market expectations, as measured by CME’s FedWatch gauge of 30-day Fed funds futures pricing.
There are several ways the Fed can steer markets toward its likely intentions without making too many commitments. Subtle changes in the language used in the statement could help, and Powell is expected to have some answers ready for the press conference to convey the likely path of future policy.
Goldman Sachs economists believe the FOMC will make some adjustments.
One crucial change could be a line in the statement saying the committee won’t cut rates until it “gains greater confidence that inflation is moving sustainably toward 2 percent.” Goldman Sachs economist David Mericle expects the Fed to qualify that statement to say it now only needs “somewhat greater confidence” to begin easing monetary policy.
“Recent comments from Fed officials… suggest they will remain dovish at their meeting this week but are close to a first rate cut,” Merkel said in a note. “The main reason the FOMC is close to a cut is the positive headlines on inflation in May and June.”
In fact, the inflation news has improved, though it’s still not great — most measures suggest the pace of price increases is still a half-percentage point or more above the Fed’s target, but has eased sharply from its mid-2022 peak. The Fed’s preferred measure, the personal consumption expenditures price index, showed a 12-month inflation rate of 2.5% in June; the CPI was at 3% and showed an actual decline of 0.1% from the previous month.
Looking for clearer signals
However, we should not expect much enthusiasm from Fed officials.
“Inflation has been very volatile this year,” said Bill English, a former Fed monetary director who is now a professor at Yale University. “They were very high last winter. Now we have a few months of good data. But I think they’re not really sure where inflation is and where it’s going.”
English expects the Fed to signal a move in September, but declined to provide a detailed roadmap for what should follow.
Central bankers often feel they can afford to be patient with policy, as inflation has fallen and broader measures of economic growth continue to show strength despite the highest benchmark interest rates in 23 years. For example, GDP growth accelerated to a better-than-expected annual rate of 2.8% in the second quarter, and the labor market has also been strong even as unemployment has risen.
“Given the level of inflation and the state of the economy, it is appropriate to ease monetary policy but it is not necessarily seen as a commitment to a full slate of easing. It is difficult to communicate clearly where monetary policy is headed,” English said.
The central bank will not provide an update on its quarterly summary of economic expectations at this meeting. This includes a “dot chart” of individual members’ interest rate expectations as well as informal forecasts for gross domestic product, inflation and unemployment.
The FOMC does not meet in August except for its annual meeting in Jackson Hole, Wyoming, which traditionally includes a major policy speech by the committee chairman.
