The New York Fed's Beige Book suggested the Fed may signal a September rate cut this week.
The Federal Reserve is set to announce its interest rate decision at 2 a.m. ET on Thursday. Nick Timiraos, a well-known financial journalist known as the “New York Fed Whisperer”, wrote in his latest article titled “Fed on the Verge of Cutting Rates”, that the Fed is unlikely to adjust its interest rates at its July meeting, but could signal a rate cut in September. He said the Fed’s recent readiness to cut rates reflected three factors: a turnaround in inflation, a softening in the labor market, and a shift in the Fed’s risk outlook on whether to allow inflation to remain above its target or to risk an unnecessary economic slowdown.
Nick Timiraos did not reveal any information about potential rate cuts in his article. He emphasized that the Fed would not set a timetable for a rate cut in September without prior commitment, which is a market consensus that a rate cut in September has already been fully priced in, including a small probability of a 50-basis-point cut.
Nick Timiraos said that Fed officials are increasingly worried about the failure of a soft landing and that the progress in inflation and the cooling labor market have changed the Fed’s risk outlook. The core inflation rate has fallen from 4.3% a year ago to 2.6% in June, while the unemployment rate has risen from 3.7% at the end of last year to 4.1% in June.
The shift in the Fed’s risk outlook can also be reflected in some speeches by Fed officials. William Dudley, the president of the New York Fed, said that the downward trend in inflation is widespread and persistent, and that the “last mile” of inflation is not as difficult as it seems, with different inflation indicators moving in the right direction and in a fairly consistent way. Fed Governor Lael Brainard said in a recent speech that the labor market is at its best now, and “we need to keep the labor market in this best state”.
Chicago Fed Chair Charles Evans emphasized that the current interest rate level was set when inflation was above 4%, but now inflation has fallen to about 2.5%, which means that the actual degree of monetary tightening has significantly increased, and there is no need to maintain such a high restrictive interest rate level when there is no sign of overheating in the economy. San Francisco Fed Chair Mary Daly warned that it is very difficult to get the economy back on track if you do not cut rates in time when the labor market starts to deteriorate, which is very different from the case of delaying hikes two years ago.