Federal Reserve Chairman Powell testifies at the Senate Banking, Housing and Urban Affairs Hearing on Capitol Hill in Washington, DC, on July 9, 2024, to review the semi-annual monetary policy report to Congress.
Chris Kleponis | AFP | Getty Images
This week’s Fed meeting is less focused on the present and likely to be very focused on the future.
If things go as expected, policymakers will once again keep short-term interest rates at last year’s levels.
However, with a raft of cooperative inflation data released in recent months, central bankers are widely expected to lay the groundwork for rate cuts starting in September. How active they are in spreading these crumbs is the main question the market is looking to answer.
“Our expectation is that they will keep rates on hold,” said Michael Reynolds, vice president of investment strategy at Glenmede. “But the (post-meeting) statement will get a lot of attention and maybe set the stage for a takeoff in September.”
Current market pricing indicates that the Fed is absolutely certain to approve its first rate cut in more than four years at its meeting on September 17-18. Last year, the central bank maintained the benchmark funds rate at a range of 5.25%-5.5%. The rate indicates what banks charge among banks for overnight loans but sets guidelines for many other consumer debt products.
As for this week’s meeting, which ends on Wednesday, traders see a rate cut as highly unlikely. However, the rate-setting Federal Open Market Committee is expected to drop a signal that action in September is highly likely as long as there are no major data issues.
Reynolds believes that the committee and its chairman Jerome Powell At his press conference, he will hope to keep his options open at least to some extent.
“They want to strike a balance. They don’t want investors to start thinking about a September rate cut and very little else that could happen,” he said.
“Opening the door to a rate cut is probably the most appropriate thing for them to do at this point,” Reynolds added. “But the market is already very excited about it and is pricing it in with almost a 100% chance. So the Fed is simply Not much needs to be done to change the narrative on this I think if they just directional tweak the statement it will do the job.
expectations of easing
Glenmed predicts the Fed will likely cut interest rates at each of its remaining three meetings starting in September. By measure, this is largely in line with market expectations CME Group’s Fed Watch Pricing indicator for the 30-day federal funds futures contract.
There are many ways the Fed can educate the market about its likely intentions without committing too much. Subtle changes in language in the statement could help achieve that goal, and Powell is expected to prepare some written answers for the press conference to convey possible paths for future policy.
Goldman Sachs economists believe the FOMC will make some changes.
A key change might be a line in statement This suggests the committee will not lower interest rates unless it has “greater confidence that inflation is sustainably heading towards 2%.” Goldman Sachs economist David Mericle expects the Fed to qualify the statement, saying it now only needs a “slight increase in confidence” to begin easing policy.
“Recent comments from Fed officials… suggest they will remain on hold at this week’s meeting but are getting closer to a first rate cut,” Merrick said in a note. “The main reason the FOMC is getting closer to a rate cut is in May and June. favorable inflation news.”
In fact, the inflation news has improved, but it’s still not great – most indicators show that prices are still rising half a percentage point or more above the Fed’s target, but it has fallen sharply from the peak in mid-2022. The Fed’s preferred indicator is personal consumption expenditures price indexshowing the 12-month inflation rate in June was 2.5%; this consumer price index It was 3%, an actual month-on-month decrease of 0.1%.
Looking for clearer signals
Don’t expect Fed officials to be too enthusiastic, though.
“Inflation data have rebounded sharply this year,” said Bill English, the Fed’s former director of monetary affairs and now a professor at Yale University. “Last winter we had pretty high numbers. Now we’ve had a few months of good data. But, I think they’re really unsure of exactly what inflation is going to be and where it’s going.”
English expects the Fed to signal action in September but will not provide a detailed roadmap for subsequent actions.
Although benchmark interest rates are at their highest level in 23 years, central bankers mostly believe they can remain patient on policy as inflation slows and broader economic growth indicators continue to show strength. For example, gross domestic product The second quarter accelerated at a better-than-expected 2.8% annualized pace, even after unemployment rate It has become higher.
“Given where inflation is, given where the economy is, easing policy is appropriate, but it should not be seen as committing to a full suite of easing policies,” English said. “It’s difficult to clearly communicate where monetary policy is headed. ”
The central bank will not provide its latest quarterly summary of economic forecasts at this meeting. This includes a “dot plot” of individual members’ expectations for interest rates and informal forecasts of gross domestic product, inflation and unemployment.
The Federal Open Market Committee (FOMC) will not meet in August except its annual retreat The conference, held in Jackson Hole, Wyoming, traditionally includes a keynote policy address from the chair.
