Federal Reserve officials this week may move closer to lowering interest rates from two-decade highs by signaling a possible rate cut in September, though they may stop short of giving details beyond that.
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The U.S. central bank’s Federal Open Market Committee will keep its benchmark rate in a range of 5.25% to 5.5% at the conclusion of its two-day policy meeting on Wednesday, the highest level it reached a year ago, according to economists surveyed by Bloomberg News. The decision will be announced through a statement after the meeting at 2 p.m. in Washington. Fed Chairman Jerome Powell will hold a press conference 30 minutes later.
Policymakers are likely to acknowledge that inflation has made progress toward their 2% target after June’s softening on consumer prices – a prerequisite for a rate cut. With unemployment rising, officials will likely signal that it’s appropriate to make policy less tight soon.
“I think they’re going to change the language in the statement to suggest a rate cut at the September meeting,” said Subhadra Rajappa, head of U.S. rates strategy at Societe Generale. She pointed to recent comments by New York Fed President John Williams, who “has said they’re looking to move away from restrictive territory — so they may use that kind of language as well.”
Rate Decision
All economists surveyed by Bloomberg are expecting no change in rates at this meeting. In their statement, policymakers are likely to highlight the improving outlook for inflation. Instead of what they said in June, that there had been “modest” progress, the FOMC could say there has been “further progress.”
The committee could also say it has gained some additional confidence that inflation is moving to the 2% target, a signal that it expects rate cuts soon.
What Bloomberg Economics Says…
“Markets have fully priced in a Fed rate cut in September, but the big question for the July 30-31 FOMC meeting is: How clearly will the FOMC signal this? We think communications from the July meeting will offer only tentative hints of a September cut, with Fed Chair Jerome Powell noting the potential for a cut ‘if data evolve as we expect.’”
— Anna Wong, chief US economist
While investors are assuming the probability of a rate cut below 5% this week is low, officials may at least discuss the possibility at the meeting. A number of prominent figures have recently argued for a rate cut in July, including former Fed Vice Chairman Alan Blinder, Goldman Sachs chief economist Jan Hatzius and former New York Fed President William Dudley.
Some economists say they will be watching to see if Chicago Fed President Austan Goolsbee, a prominent dove, will become the first policymaker in more than two years to dissent against the official decision. Goolsbee will vote this week as the alternate following the retirement of Cleveland Fed President Loretta Mester in June.
Press conference
Powell is expected to be pressed by reporters about the outlook for the next meeting in September, as well as the pace of easing for this year and next. While they will welcome the recent good news on inflation, they may also fall back on the Fed’s standard language that its policy path will be “data dependent” and that the central bank is taking steps “meeting by meeting.”
The chairman will also be asked what his level of concern is about cooling in the labor market and what would be “unexpected weakness” that would require a response. The unemployment rate, at 4.1%, is well above the low of 3.4% hit in early 2023. Data for July will be published on Friday.
For now, investors are expecting an easing of a little more than a quarter percentage point for September, indicating they see some risk of a larger cut than the usual 25 basis-point hike. They also see cuts likely in November and December, according to futures.
“Powell is likely to be asked what might constitute ‘unexpected weakness,’ which would cause him to reevaluate whether a quarterly 25 basis point rate cut is enough,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analysis.
Powell is likely to be asked again about the presidential election in November, but he will almost certainly repeat his standard line that politics plays no role in the Fed’s rate decisions.
Source: Bloomberg
