Federal Reserve: See Y’all in the Fall

The July FOMC meeting marks the one-year anniversary of the fed funds target rate hitting a 22-year high of 5.325%. While uncertainty remains, the path forward is much clearer today with the economy and inflation inching closer to what would be consistent with 2% inflation. However, although some policymakers were ready to cut rates today, the committee chose to take a more patient approach.

The Committee wants to see more of the same with regards to the data. On that point, Powell was clear that one or two data points won’t derail the likelihood of a rate cut in September. This suggests to us that the numbers will have to convince officials not to cut interest rates rather than the other way around.

The emphasis on risks to both sides of the dual mandate further echoed this sentiment, suggesting that concerns around inflation have moderated and downside risks to the labour market are taking on greater importance in the decision calculus. Those changes came through clearer in the press conference where Powell showed an openness to cut rates in September even if he didn’t offer any explicit signals. On the US election, Powell once again reiterated that politics play no role in the Fed’s decision.

We will be following trends in the data rather than politics in assigning probabilities to a September move. Powell will also have another opportunity to opine later in August at the annual Jackson Hole Symposium. Our base case continues to see the Fed lowering interest rates in September and then again in December. That said, maybe the most relevant question for monetary policy is how far the Committee will need to lower rates. Our forecast sees a less pronounced cutting cycle relative to past cycles if the Fed successfully achieves a soft landing.