While the Federal Open Market Committee (FOMC) kept its benchmark policy rate unchanged yet again, and the tone of the statement and press conference was intended to be balanced, it’s clear that Fed Chair Jerome Powell and the committee are prepared to begin cutting rates. The Fed contemplates its word choice carefully, so the new language in the statement that “the Committee is attentive to the risks to both sides of its dual mandate” is likely meant to add a slight dovish twinge.
This, along with several statements from Chair Powell during his press conference about when rate cuts would be justified, sets the stage for the September cut that everyone is expecting. Specifically, Powell explained that the Fed is “going back to look at both mandates,” suggesting that underlying concerns may prompt action in September even if the upcoming jobs report on Friday shows strength. Thus, the Fed’s focus appears to be shifting from price stability to labor market conditions. Powell emphasized this by adding that “the downside risks to the employment mandate are real now.”
Recent economic data
The economic context leading up to today’s press conference is one of improving inflation data. Powell acknowledged the positive inflation prints over the past two months, which were reversals of the hotter-than-expected data at the start of the year.
For instance, the latest PCE report, the Fed’s preferred measure of inflation, showed that overall prices increased just 0.1% in June. Year-over-year PCE inflation decelerated to 2.5% and 2.6% for the headline and core figures, respectively, providing further evidence that inflation is gradually moving toward the Fed’s target.
On the labor market, the Fed’s statement acknowledged that the unemployment rate has moved up (4.1% in June) but said it “remains low.” Indeed, based on Powell’s own characterization of the labor market—which he notes is now back to 2019 levels—it’s likely that he is still expecting a soft landing as his base case, so the dialing down of tight monetary policy conditions can framed as a "mid-cycle adjustment."
Market expectations
The ensuing market response was overwhelmingly positive with the S&P gaining about 1.4% and the Nasdaq up 2.8% on the day. The 10-year Treasury yield fell to around 4.07%.
However, investors should not get ahead of themselves. The Fed remains focused on maximum optionality, and Powell clearly does not want to commit to a certain rate path, lest the data move away from them again. Thus, with markets already fully pricing in a September cut, the communication challenge today seemed to be not wanting to change the narrative too much from what has been consensus. Indeed, markets may eventually end up disappointed— with seven rate cuts already priced in over the next 18 months, there is little positive surprise the Fed can provide. The reality is that the near-term policy path is still highly uncertain, and market predictions have oscillated widely in both directions this year.
While the Fed will continue to take a data dependent approach to determining its policy path, our rate cut forecast for the rest of the year remains unchanged—one in September, and one in December.