The spotlight is once again on Federal Reservewhich meets today and tomorrow to decide on the monetary policy. No major news is expected, but only the confirmation (promise) of a first rate cut of interest in September and perhaps one or two more moves before the end of the year. This decision should be rooted in the prospects for resilient growth and a gradual decline in inflation, in contrast to the June view of only one rate cut in 2024.
Decisions expected for this meeting
For this meeting (July 30-31) no news expected on interest rates, which should be confirmed at the historical record of 5.25-5.50%, with the promise of an initial 25 point reduction in the meeting following the summer break. But in this regard some more indications will come from Powell, not to mention that at the end of August the spotlight will be on the usual annual meeting of central banks in Jackson Hole.
What the latest data suggests
Inflation came in better than expected in June. The surprise slowdown in inflation to 3% has fueled hopes that the Federal Reserve may cut interest rates three times this year, deciding to cut the cost of money by 25 points in September. The latest data on the PCE price indexa key measure of inflation closely watched by the Fed, signaled a sharp slowdown to 2.6% from 3.4%, while the core PCE index came in at 2.9%, versus 3.7% in the previous quarter and the 2.7% expected by analysts.
In the meantime, The US economy grew by 2.8% in the second quarter of the year on a quarterly basis, versus a 2% growth expected by analysts and compared to +1.4% in the previous quarter. The increase in real GDP mainly reflects the increase in consumer spending, private inventory investment and non-residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Analysts’ expectations
According to analysts at INGthe Federal Reserve will still leave monetary policy unchanged at this week’s FOMC meeting, but will use this meeting to offer a “clearer clue who is starting to seriously consider a interest rate cutmost likely at the September meeting.” “The Fed has tried to get a ‘soft landing’ and if the data allows for cuts, and they are certainly moving in that direction, we think they will take the opportunity,” explains analyst James Knightley, Chief International Economist US at ING, citing statements from Fed Governor Christopher Wallerwho said last week “I think we are getting close to the point where a policy rate cut is justified” and President Jerome Powellwho admitted that “more good data would strengthen our confidence” that inflation is on track for 2%.”
For Payden & Rygel “the recent increase in unemployment rate should be interpreted by policymakers as a symptom of an improvement in the balance of the US labor market and not as a signal of an impending recessionas instead claimed by some investors”. For this reason, “it is theIt is unlikely that the Fed will take a sharp dovish turnwhile it should limit itself to ‘adjusting’ the Fed Funds rate. This is why we believe that the seven rate cuts priced in by the market between now and the end of 2025 are too many”.
Even for experts in MFS Investment Management “there Fed has become much more dependent on datahighlighting both sides of its dual mandate. A material weakening in the labor market and/or further normalization of consumer inflation will likely provide the central bank with the confidence to start cutting rates in September. But symmetrically, if the labor market strengthens or consumer inflation rebounds between July 31 and September 18, the Fed will once again postpone its rate cut. Therefore, Chair Powell will not announce a cut in September, but rather explain what we should look for to get one.”
