The Fed remains on hold, will it cut in September?
AInvestWednesday, Jul 31, 2024 5:55 pm ET
2min read

The Federal Reserve decided to keep its key interest rate unchanged at 5.25% to 5.5% during the July 31 meeting. In the press conference, Fed Chair Jerome Powell indicated that a rate cut in September is "on the table," contingent on favorable inflation data. This dovish signal was well-received by the markets, with stocks reaching their highs of the day during Powell's comments.

The news did not alter market expectations as 89% expect a rate cut in September with a total of three rate cuts by the end of 2024 priced in according to CME Fed Funds Futures. Markets initially rallied on the news but would give up the gains toward the end of the session. The bottom line for investors is that we will receive two jobs reports, two CPI numbers, and one more PCE data report before the Fed needs to make a decision in September. These data points will be critical in determining when the Fed will start its rate cut cycle.

Powell emphasized that any decision to cut rates in September would be based solely on economic data and not influenced by the upcoming presidential election. He reiterated the Fed's apolitical stance, stating, "We never use our tools to support or oppose a political party, a politician, or any political outcome." He assured that the central bank's economic forecasts do not factor in election results, maintaining a firm separation between monetary policy and political events.

The July 31 FOMC statement reflected a slight softening in the language compared to the June 12 statement. While the June statement noted "job gains have remained strong, and the unemployment rate has remained low," the July statement acknowledged that "job gains have moderated, and the unemployment rate has moved up but remains low." This change highlights the Fed's recognition of a cooling labor market.

On inflation, the language was also softened. The June statement said, "Inflation has eased over the past year but remains elevated," whereas the July statement revised this to "Inflation has eased over the past year but remains somewhat elevated." This subtle shift suggests the Fed sees continued progress in reducing inflation pressures.

Regarding progress toward the inflation objective, the June statement mentioned "modest further progress toward the Committee's 2 percent inflation objective," while the July statement described "some further progress." Although nuanced, this change indicates a cautious optimism about achieving the inflation target.

The Fed's assessment of the balance of risks also evolved. The June statement indicated that "the risks to achieving its employment and inflation goals have moved toward better balance," while the July statement noted these risks "continue to move into better balance." This ongoing adjustment shows the Fed's vigilant monitoring of economic conditions.

Lastly, the voting members of the FOMC saw a minor change, with Austan D. Goolsbee voting as an alternate member at the July meeting, replacing Loretta J. Mester. This alteration did not significantly impact the overall decision-making process but is noteworthy for tracking the composition of the committee.

Overall, Powell's comments and the changes in the FOMC statement highlight a dovish shift, with an emphasis on the possibility of a rate cut in the near future, contingent on further improvements in inflation and a stable labor market. The market's positive response underscores the anticipation of a potential easing of monetary policy.

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