Investors seek hints on September Fed rate cut

The Federal Reserve is widely expected to hold interest rates steady at the conclusion of its policy meeting Wednesday. However, investors are eager for clues about the possibility of a rate cut in September.

A big week for #CentralBanks with policy meetings in Japan, the UK, and the US.
In terms of outcomes, from most probable to the more uncertain:
The #FederalReserve will signal the likelihood of a September cut (as you know, I think that a more forward-looking Fed would/should cut…

— Mohamed A. El-Erian (@elerianm) July 29, 2024

In a post-meeting statement and a press conference, Fed Chair Jay Powell may provide insights into the Fed’s monetary policy direction. This is especially important given recent economic trends. The Fed’s policy statement might highlight progress toward the central bank’s 2% inflation goal. It may also acknowledge a recent cooling in the job market.

From the @WSJ article by @NickTimiraos on this week’s #FederalReserve policy meeting:
“One reason officials aren’t likely to deliver a cut this time despite the growing case for one is that it would likely be the first reduction in a sequence to recalibrate rates lower. Officials…

— Mohamed A. El-Erian (@elerianm) July 29, 2024

Powell could use the press conference to signal stronger indications about future monetary policy. This could potentially reinforce market expectations for a rate cut at the Fed’s next meeting on September 17-18.

Tomorrow's News Today…

BREAKING: THE FED HOLDS INTEREST RATES AT 5.25-5.50% BUT SENDS A STRONG SIGNAL OF A 25 BPS RATE CUT IN SEPTEMBER.

— Charlie Bilello (@charliebilello) July 30, 2024

“We think Chair Powell will offer that the latest inflation readings add to the Fed’s confidence that inflation will head towards the 2% inflation target,” said Morgan Stanley chief economist Ellen Zehner. At the same time, “we think he will again note that the labor market is in better balance,” she added. Traders and investors will closely monitor statements for any subtle hints regarding future policy moves. Some key Fed officials have emphasized that inflation is sustainably dropping towards their 2% target. They are also paying more attention to rising unemployment.

Investors monitor Fed’s policy signals

This is another sign that rate cuts may be imminent. The latest reassurance came last Friday when the core Personal Consumption Expenditures (PCE) index showed its lowest annual gain in over three years. The 2.6% annual increase in June matched May’s level and was down from 2.8% in April. On a three-month annualized basis, core PCE dropped to 2.3% from 2.9%. Another critical inflation measure, the Consumer Price Index (CPI), has also shown progress. On a “core” basis, which excludes volatile food and energy prices, the CPI rose 3.3% year-over-year in June. This was down from 3.4% in May and 3.6% in April. Some analysts argue that economic data supports a rate cut at this meeting, although they do not expect it to happen. “I don’t see a reason within the economic data that they should not cut this meeting,” said Wilmington Trust chief economist Luke Tilley. “In fact, I think it’s hard to see a reason that they should keep rates where they are.” However, he added that announcing a cut now could risk “spooking the markets.” Tilley predicts one cut in September and another in December, followed by a total of six quarter-point cuts in 2025. The last median estimate from the 19 Fed officials influencing the direction of rates forecasted one rate cut this year. This prediction was made in early June. However, with cooling inflation, officials might be more open to two cuts before the end of the year. The Fed will announce its policy decision Wednesday at 2 pm ET, followed by Chair Powell’s press conference at 2:30 pm ET.