This week, it is anticipated that the Federal Reserve will pave the way for decreased lending costs in light of favourable inflation trends and a seemingly softening job market in the United States.
The Federal Open Market Committee seems set to once again maintain its key interest rate at a 23-year peak of 5.25-5.5 percent, following their two-day assembly, ending on Wednesday. Despite an anticipated unexciting decision on the rate, this meeting will act as a crucial stage for further preparation towards a shift in monetary policy possibly by September.
Brian Sack, ex-chief of New York Fed’s Market Group and current macro strategy head at Balyasny Asset Management, expresses that the Federal Reserve is nearing a rate cut and this week’s dialogue should mirror this direction.
Recent clear indications that inflation is under control have granted officials the leeway to more openly consider rate reductions. The growth of consumer prices have significantly mellowed in recent months, mitigating earlier panic and unexpected hesitations. The labour market, previously a worrying factor feeding inflationary pressures, is experiencing changes as well. The rapid hiring momentum has eased, leading to a decelerating wage growth trend.
There is a rise in the number of people being laid off, resulting in an increase in the three-month average unemployment rate by 0.43 percent compared to its minimum point over the past year. This is narrowly below the 0.5% signal for the SAHM Rule signalling the onset of recession.
The officials strive to sustain a robust job market and realise that holding their policy rate inflated for too long could threaten it.
This Wednesday, the Federal Reserve is expected to directly address these changes in an updated policy announcement as well as in chairman Jay Powell’s press conference.
The Federal Open Market Committee (FOMC) revealed in June a marginal progression towards their target of maintaining inflation at 2 per cent, highlighting their extreme vigilance of inflation threats. They also repeatedly asserted their reluctance to decrease rates until they were more certain that inflation was consistently moving towards their objective.
It is expected that the Fed will confirm further advances. The core measure of inflation relied upon by the central bank currently stands at 2.6 per cent, significantly below the 2022 peak.
Several economists are of the opinion that the assertion will stress that high inflation isn’t the sole threat faced by the Fed now that the job market has become more fluid. Jerome Powell has emphasised the potential risk the central bank poses of creating unnecessary job redundancies if it does not swiftly provide relief to U.S. businesses and borrowers.
Furthermore, the FOMC will likely reassert its growing confidence in its grasp of inflation and consequently its readiness to slash rates.
Thus far, Mr Powell and other officials have avoided any specific discussion about the likely timing of the initial rate-cutting move, instead stating that such decisions rely on a meeting-by-meeting analysis and the changing landscape of the data.
During the interval between the July and September meetings, the Fed will receive two updates of inflation and employment figures among other updates. Predictions indicate that the incoming data will underscore the necessity to cut the rates.
Some economists caution that the Fed is nearing a mistake by postponing a rate cut until September, given the clear economic deceleration. According to former President of New York’s Federal Reserve, Bill Dudley, “Although the opportunity to avert a recession by reducing rates may have passed, any further delay increases the threat unnecessarily”.
The Fed, however, notes multiple advantages of postponing. It has been caught off guard previously, and the officials wish to ensure they have solid control over inflation prior to executing any crucial policy adjustments.
There is still a diverse range of opinions internally about the appropriate next steps for rates. As recent as June, a near equal divide could be seen among policymakers in regards to a single quarter-point reduction compared to two for the year.
Ellen Meade, a former top adviser to the Federal Reserve’s board of governors who now works at Duke University, believes chair Jerome Powell may postpone until September to rally the required consensus. She notes there is a precarious balance between acting too late or prematurely, asserting the Fed might be erring on the side of caution following early-year inflation trends.
Peter Hooper, the vice-chairman of research at Deutsche Bank and a former Fed employee of nearly three decades, also considers a September delay for initiating the Fed’s easing cycle a sensible move. Hooper added that should the job market deteriorate more rapidly or severely than forecasted, the Central Bank can feasibly transition to a “neutral” policy fairly swiftly.
Hooper’s team foresees potential further rate decreases in November and December before a pause till September 2025. Following this hiatus, they project incremental cuts to bring the policy rate back to a range of 3.5-4 per cent eventually.
Meanwhile, the Bank of England’s upcoming Thursday meeting hangs in the balance, due to an unanticipated surge in UK services inflation. Policymakers are deliberating whether or not to proceed with the first interest rate cut since 2020. Copyright The Financial Times Limited 2024.