The Fed’s Base Case: September Rate Cut Likely
Chair Powell says it would likely take a significant upside surprise in inflation for the Fed not to deliver a rate cut this September.
- Markets & Economy
- Central Banks
- Monetary Policy
- Commentary
Key Points
What it is
The Federal Reserve is contemplating a rate cut in September, contingent on continued progress in reducing inflation and a steady labor market.
Why it matters
A potential rate cut could indicate a shift in monetary policy, which may potentially influence market conditions and financial strategies.
Where it's going
With the focus on upcoming inflation data, any continued improvement could heighten the possibility of a September rate cute, highlighting the importance of monitoring economic trends.
At his July press conference, when commenting on the inflation data received over the past few months, Fed Chair Jay Powell noted that the observed this year has been broad-based, touching all three main categories of core inflation: goods, non-housing services, and housing. He contrasted that with the progress seen last year, which he described as being mostly driven by unsustainable disinflation in goods prices.
The Chair’s comments on conditions in the labor market were also very telling. He characterized them as strong but no longer overheated, even adding that downside risks to the Fed’s employment mandate are “real now.” He remarked several times that he saw the labor market as normalizing — close to pre-pandemic conditions — and volunteered that he no longer thinks of the labor market as a likely source of inflationary pressures.
Addressing the outlook for monetary policy, the Chair said that the recent data “have certainly added to confidence” that we are on a sustained path toward two percent inflation. He even acknowledged that there was a discussion about cutting rates at the July meeting. But, in the end, “a strong majority supported not moving at this meeting,” preferring instead to see “more good data” on inflation.
When asked whether he saw a September rate cut as his baseline scenario, the Chair initially gave a cautious response, saying there were scenarios where it would be appropriate to cut and others where it would not. Later in the press conference, however, he all but relented, remarking that “if we get the data that we hope we get […], a reduction in our policy rate could be on the table at the September meeting.” This is probably as close as we will get to a confirmation that a rate cut in September is the Fed’s . So, like the Chair, we will be watching inflation data closely between now and September, knowing that it would likely take a significant upside surprise in inflation for them not to deliver .
Base case refers to the most likely scenario, providing a reference point for comparison.
The term disinflation is used when there is a reduction in the pace of price inflation over a short time.
Main Point
Fed Signals Possible Rate Cut in September
Since April, we have pointed to September as the most likely timing for the start of Fed rate cuts. This has been our base case, and now, with recent progress on inflation and a normalizing labor market, it appears to be the Fed’s base case, too.
Rate Cuts Begin
Antulio N. Bomfim
Head of Global Macro – Global Fixed Income
Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.
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