Fed keeps rates unchanged, but opens the door wider for a September cut
Growing anxieties about a slowing labour market increasingly point to the Fed cutting interest rates in September.
No surprises from the Fed yesterday as it voted to keep interest rates unchanged. However, anxieties about growing risks to the labour market are clearly growing among FOMC members. The statement accompanying the meeting contained some key language changes that suggests a September rate cut is now very much on the cards, providing the economic data between now and then remains benign.
FOMC acknowledged a slowing labour market and dissipating inflation
Despite acknowledging that activity in the economy is continuing to grow at a solid pace, the growth in new job openings was described as “having moderated” compared to the previous “remained strong”, with the overall rate of unemployment, instead of “remaining low”, now said to have “moved up but remains low”. Meanwhile, on the inflation front, "some further progress" is now used to describe the headway that has been made in lowering CPI back to its 2% target, rather than just “modest progress”, while remaining inflationary pressures in the economy were described as only “somewhat” elevated now.
The dual mandate now clearly in focus
But perhaps the key message was the clear tilt to the Fed’s dual mandate of ensuring full employment as well as low inflation, the FOMC described as now “attentive to the risks to both sides of its dual mandate”. This last point very much ties in with the message delivered by Powell at his Monetary Policy Testimony last month, when he acknowledged for the first time that some members of the FOMC were expressing concerns about the dangers presented to the labour market of cutting interest rates too late and by too little. The changes in the statement certainly solidify this warning and highlight that the FOMC is cognisant of the growing risks to the labour market the current high level of interest rates present. Clearly confidence is growing that the monetary tightening delivered to date has been sufficient to ensure CPI moves back to target and that the focus of attention is now shifting towards the actions needed to ensure an unnecessary rise in job losses is avoided.
Next two CPI reports now key for the FOMC
However, the FOMC retained the language that further progress would need to be seen that CPI was moving definitively back to target before it would consider it appropriate to cut rates. This basically translates as everything depends on the two CPI reports to be released between now and the September FOMC meeting. Providing they show no cause for alarm and do not throw up any nasty surprises, then the way looks clear for an interest rate cut to be delivered.
Market eyes will be on the Jackson Hole Symposium
Although the market was not expecting rates to be cut at this meeting, the fact that we got no explicit signal that rates would be cut in September appears to have proved disappointing, with a small decline seen in the amount of easing expected to be seen by end-year. However, with two CPI and employment reports to come before the FOMC next meets, it was highly unlikely Powell was going to effectively rule out their potential impact and commit to a rate cut now. As we have previously suggested, it is far more likely that Powell will now use his address at the forthcoming Jackson Hole Symposium to signal to the market to expect an imminent change in the direction of Fed policy (https://www.equiti.com/sc-en/news/global-macro-analysis/will-the-fed-signal-an-impending-policy-change-at-this-years-jackson-hole-symposium/)
Market underpricing amount of cuts to be delivered this year
The key question, therefore, is how fast the FOMC will cut rates going forward. Although the markets are currently pricing in around 66bps of cuts by end year, our own expectation is that the labour market will slow faster than is currently foreseen and that total easing closer to 100bps will be seen, with cuts delivered at all three remaining FOMC meetings this year.
Providing the two CPI reports to be released between now and the September FOMC meeting present no cause for alarm, the door is now wide open for an interest rate cut to be delivered at the next FOMC meet.