Key insights into the upcoming Federal Reserve decision

On July 9, 2024, U.S. Federal Reserve Chairman Jerome Powell delivered his semiannual monetary policy report to Congress, addressing banking, housing, and urban issues in the Senate.

The focus of this week’s Federal Reserve meeting is more on future actions than immediate changes.

As expected, policymakers are likely to keep current short-term interest rates in line with last year’s levels.

However, recent supportive inflation data has led to widespread speculation that the Fed may signal a willingness to cut interest rates starting in September. The degree of clarity provided in their forward guidance will be crucial to market interpretations.

“We expect rates to remain unchanged,” said Michael Reynolds, vice president of investment strategy at Glenmede. “However, the post-meeting statement will be closely watched for clues to potential rate cuts in September.”

Current market sentiment strongly suggests an imminent rate cut at the Fed’s Sept. 17-18 meeting, marking the first such move in more than four years. The central bank has kept its benchmark funds rate in the 5.25%-5.5% range for the past year, impacting a variety of consumer debt products.

For this week’s meeting, which ends Wednesday, traders see a slim chance of a rate cut. However, the Federal Open Market Committee (FOMC) is expected to suggest that barring significant economic disruptions, a rate cut in September is likely.

Reynolds believes that both the committee and Chairman Powell, during his press conference, will try to maintain some flexibility.

“They have to balance expectations. They don’t want investors to be absolutely certain of a rate cut in September without considering other potential developments,” he said.

“Signaling a rate cut is prudent at this time,” Reynolds added. “With markets already anticipating it with near certainty, the Fed’s job is to subtly adjust the narrative to achieve the desired outcome.”

Easing expectations

Glenmede expects rate cuts at each of the three remaining meetings starting in September, in line with market expectations tracked by CME’s FedWatch tool for 30-day federal funds futures.

The Fed can steer market expectations through nuanced changes in its statement and policy messaging during Powell’s press conference.

Goldman Sachs economists expect the FOMC to make some changes.

One key adjustment could be to change the statement that rate cuts will not begin until there is “greater confidence that inflation is sustainably moving toward 2 percent.” Goldman Sachs economist David Mericle predicts a shift toward requiring only “slightly greater confidence” to begin easing.

“Recent official comments from the Fed suggest they are holding firm at this week’s meeting, but are moving closer to a rate cut,” Mericle said in a note. “The main driver is the positive inflation data in May and June.”

While inflation has improved, it remains slightly above the Fed’s target: metrics still show price increases of about half a percentage point more, although significantly below mid-2022 peaks. The Personal Consumption Expenditures Price Index reported an annual inflation rate of 2.5% in June; the CPI index showed 3% with a monthly decline of 0.1%.

Looking for clearer signals

Despite these developments, don’t expect any explicit enthusiasm from Fed officials.

“Inflation data has been volatile this year,” said Bill English, a former Fed monetary director now at Yale. “Last winter’s strong numbers were followed by a couple of good months, but there’s still a lot of uncertainty about the path of inflation.”

English expects the Fed to signal a potential move in September without specifying follow-up actions.

With inflation falling and economic growth remaining robust despite high interest rates, central bankers believe they can afford a patient approach. For example, GDP grew at an annualized 2.8% in the second quarter, with a strong labor market despite rising unemployment.

“Given current economic and inflationary conditions, easing is appropriate but should not be seen as a commitment to a series of rate cuts,” English said. “Communicating the direction of monetary policy remains a challenge.”

The Fed will not update its quarterly economic projections or its dot plot of rate expectations at this meeting.

The FOMC does not meet in August, except for the annual retreat in Jackson Hole, where the chairman typically delivers the keynote address.