The FOMC held rates at 5.25%-5.50% once again today, matching market consensus and our own pre-decision call.
That said, the Committee has seemingly taken one step closer to easing in our view, shifting the focus of their latest communications towards both sides of the Fed’s dual mandate. We think this sets up a September rate cut, provided the next two CPI reports show continued signs of disinflation, though Chair Powell studiously avoided confirming this explicitly in his press conference. In any case, we continue to look for two 25bp rate cuts from the Fed this year, in September and then again in December.
Working through the details of today’s communications, the FOMC toned down the language used in the policy statement to characterise both the labour market and inflation.
Fed officials now see job gains as having “moderated”, while the unemployment rate has “moved up”, and price growth is now only “somewhat” elevated. This was accompanied by a new line suggesting that the committee is attentive to “risks to both sides of its dual mandate”, having previously only noted inflation risks. This should open the door to rate cuts at the next FOMC meeting.
Broadly speaking, Chair Powell took a similar tone in his press conference too. He emphasised labour market normalisation and disinflation progress, while largely dismissing growing spots of weakness in the data. Granted, Chair Powell did acknowledge that policymakers “don’t want to see a material further cooling in the labour market”, though not in a manner suggestive that he felt this a serious risk. This left Powell to suggest that a rate cut “could be on the table as soon as the next meeting in September”, in keeping with the Fed’s data dependency.
Markets though, have largely ignored the Chair’s demurring on this point, continuing to fully price a rate cut in September, with 2.6 cuts expected by the end of the year.
As we see it, Powell is correct that the labour market has moved into balance, but we also see building downside risks to the US economy, with growing odds that Fed is now moving too late and too slowly. But based on recent communications this is only likely to be a problem that becomes obvious for the FOMC much later in the year, or more likely, in 2025. As such, we continue to look for a rate cut in September, in line with current market pricing, though we think the Fed’s cautious approach tilts the balance of risks towards only one further cut in Q4, likely in December, with a more rapid pace of easing likely to only come next year.
Author:
Nick Rees, FX Market Analyst