The Fed: On hold but opening the door for a September rate cut

Since the last FOMC meeting in June, economic data in the US have been consistently softer, reinforcing the Fed’s oft-repeated mantra that the US labour market is in better balance and that there is increased evidence of inflation pressures abating. Despite this, the statement accompanying the meeting was, if anything, a little more hawkish than anticipated, stating that “inflation remains somewhat elevated”. This could reflect the Fed’s desire not to be wrong-footed in case the data do not improve further.

Nonetheless, a continuation of recent softer macro trends over the next six weeks will cement expectations for a September rate cut (see Chart 1). The September meeting also has the advantage that a revised Summary of Economic Projections – including dot plots - will be released, allowing the Fed greater flexibility in finessing its messaging.

Chart 1. Federal funds target range probability implied by Fed fund futures

Source: CME FedWatch. Data as at 01 August 2024. Probabilities may not sum to 100% due to rounding.

Between now and then, there are several significant data releases on which to focus. These include: July and August data from the monthly US labour reports, Purchasing Managers’ Index (PMI) and Consumer Price Index (CPI) inflation releases, as well as the July Personal Income and Outlays report that includes the Fed’s preferred inflation measure, the core Personal Consumption Expenditure (PCE) deflator.

It is important to note that inflation does not need to be at the Fed’s 2% target for the FOMC to cut rates. It will be sufficient for the Fed to be confident that inflation will decline in coming months back towards target for policy to be eased. More light will be shed on whether the Fed has gained that confidence in its September Summary of Economic Projections.

The Fed will avoid speculating about how the US Presidential election outcome might influence the trajectory of the US economy and will instead focus on the data. This reflects a desire for any policy decision to be viewed as independent of November’s election.

In summary: 

• The Fed was on hold, as expected.
• The accompanying statement was a little more hawkish than expected, reflecting the Fed’s desire not to be wrong-footed if data do not improve further.
• The door was still opened for a September rate cut and a continuation of recent softer macro trends over the next six weeks will cement expectations for this outcome.
• Though inflation does not need to be at the Fed’s target for the FOMC to cut rates, the Fed needs to be confident it will decline to target in coming months – such a message could be delivered in September’s Summary of Economic Projections.
• The Fed will want any policy decision to be viewed as independent of the Presidential election and will thus focus on data rather than speculating on what the election outcome might mean for the economy.