Federal Reserve Expected to Hold Rates, September Cut Uncertain

Investors awaiting the Federal Reserve's decision on interest rates may be disappointed if they are looking for clear signals of an impending rate cut. The market widely expects policymakers to maintain the current interest rate for the fifth consecutive time during their meeting from July 29 to 30. Any dissenting votes from officials could indicate that some members of the Federal Open Market Committee (FOMC) are leaning towards an earlier rate cut.

However, with a significant amount of economic data set to be released before the next meeting in September, Chairman Powell may choose to keep policy options flexible. This approach would allow for a clearer understanding of the economic trajectory and policy path. The Federal Reserve's decision on interest rates will be announced at 2 p.m. Washington time on Wednesday, followed by a press conference with Powell 30 minutes later.

Looking ahead to September, the Federal Reserve has only three more policy meetings scheduled for the year. According to the median forecast from June, officials plan to implement two 25 basis point rate cuts by 2025. Some economists, such as Veronica Clark from Citigroup, believe that a rate cut in September is highly likely. Clark noted that while most officials are still in a wait-and-see mode, a September rate cut would be reasonable.

However, it remains uncertain whether Powell will guide market expectations in this direction. According to the pricing of federal funds futures contracts, investors believe there is a probability of over 60% for a rate cut in September. Before the next policy meeting on September 16-17, decision-makers will receive two more employment reports, including the July report to be released on Friday. They will also gain additional insights into inflation, consumption, and housing data.

If the committee wishes to maintain policy flexibility, it must adopt a neutral stance and continue to emphasize the importance of data. If the Federal Reserve chooses to maintain its "strong" description of the labor market in its post-meeting statement, it could prompt dissenting votes from officials concerned about the fragility of U.S. employment prospects. Earlier this month, one of the governors, Christopher Waller, outlined his support for a July rate cut, expressing concerns about the labor market being on the "edge" and the potential for a rapid deterioration if the Federal Reserve does not provide more support. Another governor, the vice chairman for supervision, also indicated readiness to support a rate cut as early as this meeting.

If both officials cast dissenting votes, it would mark the first time since 1993 that two governors have simultaneously dissented during a policy meeting. While this would be symbolic, some observers note that disagreements among officials are normal, especially as policy approaches a turning point.