– FOMC Repeats Doesn’t Expect Rate Cut Til ‘Greater Confidence’ Inflation Headed To 2%
– Powell: Rate Cut May be ‘On The Table” At Sept FOMC, But Need More Good Data
– FOMC Statement More Upbeat About Inflation; Less Upbeat About Jobs
By Steven K. Beckner
(MaceNews) – The Federal Reserve refrained from cutting interest rates Wednesday but its rate-setting Federal Open Market Committee did lay the groundwork for a possible, initial reduction at its next meeting in mid-September.
Chair Jerome Powell and his fellow monetary policymakers hinted that they are headed toward an initial rate cut in coming months, possibly as soon as September, but they stopped short of giving a strong or assertive near-term monetary easing signal.
The FOMC repeated that it won’t cut rates until it gains “greater confidence” that inflation is headed “sustainably” to 2%, but its policy statement contained other changes suggesting greater concern about the “maximum employment” side of the Fed’s “dual mandate, as well as greater comfort with “progress” toward its inflation target.
Powell told reporters the Fed is “getting closer to a point where it will be appropriate to dial back restriction” due to a combination of better inflation data and softer labor market data.
Financial markets are placing high odds on a 25 basis point rate cut at the FOMC’s Sept. 17-18 meeting, with more reductions to follow. but Powell stopped short of sending a definitive signal on the timing or amount of second half rate cuts.
He did say a rate cut may well be “on the table” at that meeting, but said “we’re not there yet” and noted that a lot of important data will be coming between over the next six weeks.
He strongly denied that the timing of the Nov. election will influence the decision.
Despite mounting pressure on the Fed to lower short-term interest rates, the FOMC left the federal funds rate in a target range of 5.25% to 5.50% for an eighth straight meeting after raising that key money market rate 525 basis points between March 2022 and July 2023. But the FOMC made significant changes to its policy statement, which suggest rates are about to start moving in the opposite direction before too much longer.
A key policy sentence was left unchanged. As before, the FOMC said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
However, the FOMC seemed to soften that assertion by altering its preceding characterization of economic conditions in notable ways.
In its latest statement, the FOMC says, “Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2% inflation objective.”
By contrast, the June 12 statement had put less emphasis on labor market softening and inflation progress: “Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.”
The July 31 language, though not dramatically different, sounds somewhat more upbeat about the inflation outlook and less upbeat about the labor market’s prospects. In another significant change to the July statement, the FOMC now proclaims it is “attentive to the risks to both sides of its dual mandate” – instead of saying it is “highly attentive to inflation risks,” as in the June statement.
Powell reinforced that basic message in his post-FOMC press conference, saying that, on the one hand, “good data” on inflation has made Fed policymakers “more confident” it is headed to 2%, while, on the other hand, the labor market is “cooling.”
Powell said he “would not like to see further cooling of the labor market,” before amending the comment to say he wouldn’t want to see any “material cooling.”
He said the labor market is “normalizing” in ways the FOMC had hoped it would and said he and his colleagues will be ‘watching closely to see if it’s more than that.” If so, he vowed, the Fed “will respond.”
Powell said the Fed doesn’t want to ease “too late” and risk hurting the economy and employment but said it is “well-positioned to respond” if the labor market does weaken more than expected. So far, he said, unemployment remains “historically low” at 4.1%.
“What we’re thinking is how do we keep this (combination of moderating inflation and normalizing labor markets) going?” he said. “The job is not done on inflation, but we can afford to begin to dial back the restriction.’
How much the Fed will cut rates remains unclear. In their June Summary of Economic Projections, FOMC participants projected just one rate cut this year to a median 5.1% (5.0% to 5.25%), but officials were closely divided, with eight of the 19 projecting two rate cuts this year. Next year, the funds rate was projected to fall to a median 4.1% (4.0% to 4.25%).
Addressing that very issue, Powell said “we’ve made no decisions about future meetings including September,” but he said, “the economy is moving closer to the point where it will be appropriate to reduce the policy rate.”
He noted the FOMC will compile a new set of rate projections when it publishes a revised, quarterly SEP in September. Meanwhile, he said the Fed will be evaluating a wide variety of data.
Powell stressed the exact timing will be “data dependent…The question will be whether the totality of the data and the outlook for the balance of risks is consistent with” rate cuts.
He added that an initial rate cut could be “on the table as soon as September. We’re getting closer to where it will be appropriate to reduce our policy rate.”
But he added, “we’re not quite there yet.”
Powell suggested that a September rate cut would become more likely “if we were to see inflation moving down quickly or in line with expectations…,” but said “if inflation were to remain stickier … we would weigh that.”
As reporters continued to probe the odds of a September rate cut, Powell welcomed better second quarter inflation data, but said “we need to see more to have confidence we’re on a path down to 2%,…but our confidence is greater, because we’ve been getting good data…It looks like an economy that’s normalizing…”
Powell said a slowing of demand that has cooled both inflation and formerly “overheated” labor markets proves that monetary policy is “restrictive,” and he reiterated that “the time is coming … at which it will begin to be appropriate to dial back the level of restriction so we can address both mandates.”
An initial rate cut could come “as soon as the next meeting, depending on how things come in,” he went on. “We think the time is approaching, and if we do get the data we hope we get a reduction could be on the table at the September meeting.’
While holding rates steady, the FOMC reaffirmed its policy of “reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities.” This means the Fed will continue to moderate the pace of so-called “quantitative tightening” or balance sheet shrinkage.
At its May 1 meeting, the FOMC announced that, beginning in June, it would reduce its securities portfolio by $60 billion per month instead of by $95 billion per month by allowing fewer maturing Treasury securities to roll off the balance sheet. It authorized the New York Fed to roll over at auction the amount of principal payments from the Fed’s holdings that exceeds a cap of $25 billion per month – down from $60 billion. It left unchanged the amount of MBS reinvestments at $35 billion.
Speculation has mounted that the FOMC will soon end QT altogether and stop shrinking its balance sheet. But Powell did not address this issue. Nor was he asked about it.
The July meeting took place against the backdrop of favorable data.
The price index for personal consumption expenditures, the Fed’s preferred inflation gauge, rose by 0.1% in June or 2.5% from a year earlier, as the Commerce Department reported Friday. The core PCE index was up 0.2% and 2.6% respectively. The Labor Department had previously reported that the consumer price index fell 0.1% in June, leaving it 3% higher than a year ago. The core CPI was 3.3% higher.
Meanwhile, labor market conditions have been softening. Although non-farm payrolls rose a respectable 200,000 in June, the unemployment rate rose another tenth to 4.1%, compared to 3.4% at the start of last year. The closely watched job vacancy-unemployment ratio has fallen from 2.0 to a pre-pandemic 1.2. Wage gains have moderated, as shown Wednesday by a June dip in the Employment Cost Index.
Economic activity “has continued to expand at a solid pace,” as the FOMC statement reiterated. The Commerce Department estimates that real GDP at a 2.8% annual rate in the second quarter – up from 1.4% in the first quarter. Core PCE inflation was up 2.9% in the period.