As widely expected, the Federal Reserve (Fed) held interest rates steady at the July 31, 2024, Federal Open Market Committee (FOMC) meeting. The notable alterations in the FOMC statement since the June version clearly suggested that the Fed is laying the groundwork for rate cuts. Job gains were described as having moderated (not “remained strong”). The statement noted “some further progress” on inflation as opposed to “modest” progress given the favorable second quarter inflation readings. Equally important, for the first time in two years, the FOMC stated that it is attentive to risks to both sides of its dual mandate. However, despite this change in tone, the FOMC statement was non-committal on rate cuts. It noted that the Committee needed to gain greater confidence that inflation is moving back to target.
We believe the FOMC clearly wants to preserve optionality in the event of data surprises between now and its next meeting. Chair Jerome Powell also echoed the same balanced and cautious sentiment in his opening remarks at the press conference, stressing overall data (not datapoint) dependency. In fact, he even laid out scenarios where there could be “zero cuts to several cuts,” thus avoiding explicit forward guidance that markets were anticipating.
However, as is routinely the case with Powell’s back-and-forth with reporters, what was left implicit in the FOMC statement, Powell addressed overtly. He stated that the time to cut is “approaching” and noted the Committee itself was moving closer to cutting rates. He also went so far as to say that FOMC participants had discussed the possibility of cutting at this meeting. Powell also expressed greater confidence in the disinflationary outlook. While he pointed out that the job on inflation wasn’t done yet, he noted that the Fed does not need to focus all of its attention on inflation due to the progress made. Even though Powell described the labor market as strong, it is not overheated, and he shrugged off the Sahm Rule1 as more of a “statistical regularity” than a rule. He did admit that the labor market has moved quite a bit, referring to the rise in the US unemployment rate. (Although, as we noted recently, new entrants and re-entrants have been driving the recent rise.) In fact, Powell also stated that unemployment is closer to target, which is likely what led him to note that downside risks to the labor market have become more tangible. Therefore, going forward, payroll prints should assume greater importance.
In all, provided the “totality” of data complies, we expect to see the Fed begin its easing cycle in September with a 25-basis point (bp) cut, followed by one more in December. Markets currently anticipate nearly 75 bps of cuts this year. Meanwhile, Powell’s address in Jackson Hole, Wyoming on August 22, 2024, will be an important one since he’ll have another month of jobs and inflation data. The previous two speeches have been particularly notable for Powell’s hawkish push back on market expectations.
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1. The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.
