As Federal Reserve officials convene for their upcoming meeting, the expectation is that interest rates will remain unchanged, with a potential signal for a 25 basis point rate cut at the following meeting in September. The strategic approach taken by the Fed leadership aims to methodically build a case for the rate cut, establishing internal consensus before explicitly pre-signaling the move. There is a belief among strategists that Chairman Powell will likely wait until the end of August, specifically the Jackson Hole gathering, to deliver the signal for the September rate cut, allowing for the incorporation of another month’s worth of data.
Leading up to the July meeting, the discussion revolves around how forward-leaning the Federal Open Market Committee (FOMC) is willing to be in their positioning, particularly in support of Chairman Powell’s perspective on shifting risks to inflation and employment. Key elements to watch for in the upcoming statement include language upgrades on inflation progress, assessment of labor market moderation, and an emphasis on the balance of risks. There is speculation regarding a potential alteration to the third paragraph of the recent FOMC statement, which currently suggests a lack of urgency for rate cuts until inflation exhibits sustainable movement towards the 2% target.
Analysts at Citi echo similar sentiments, foreseeing the July meeting as a platform for building consensus and signaling a forthcoming rate cut. Barring any significant deviation in inflation figures, officials are primed to execute the anticipated 25 basis point rate reduction in September. The potential for a more aggressive easing cycle, characterized by continued cuts in subsequent meetings or even a 50 basis point cut, is contingent upon unforeseen shifts in the unemployment rate or a significant downturn in equity markets serving as a restrictive force on financial conditions.
In parallel expectation, economists at Macquarie project a similar trajectory of a 25 basis point rate cut in September, with a more pronounced outlook for a total of 75 basis points in cuts by early 2025. This projection aligns with the assumption of unforeseen weaknesses in the labor market prompting a more accelerated easing cycle beyond initial estimations. The evolving economic landscape, coupled with external market forces, stands to shape the Federal Reserve’s policy decisions in the coming months.