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By Olumide Owolabi
A newly dovish Federal Reserve likes what it sees on inflation and jobs but is waiting on interest rate cuts.
At its July meeting, the Federal Open Market Committee held the federal funds rates unchanged for the eighth consecutive time, with a balanced statement that contained a few adjustments.
The Fed unanimously left its benchmark rate in the 5.25% – 5.50% range, but its statement reflected a few edits that, compared to June, tilted toward dovishness. The first key change was in its characterization of the labor market, noting that “job gains have moderated, and the unemployment rate has moved up but remains low.” The second edit was to highlight the growing importance of labor market trends in its next policy decision. The statement now reads, “The committee is attentive to the risks to both sides of its dual mandate,” rather than the previous language that it “remains highly attentive to inflation risks.”
During his press conference, Chair Jerome Powell reiterated the Fed’s continued data dependency but became increasingly dovish as the event wore on. His attempt to sidestep whether a September rate cut was on the table only invited more questions that led to responses making it clear that policy change at the September meeting is a real possibility.
A few other takeaways from the press conference:
- On inflation, the Fed is comfortable with recent progress: “The last couple of readings have added to confidence. We’ve seen progress across all three categories of core PCE inflation, goods, non-house services and housing services…more good data would cause us to gain more confidence.”
- On a September cut, Powell acknowledged that it had been discussed and that the next meeting would contemplate such action if progress on inflation continued.
- Regarding the path of the economy, he expressed increased confidence in a soft-landing scenario. The committee “doesn’t see the economy [as] overheating or sharply weakening; that’s not in the data right now. What’s in the data…is an economy that’s growing at a solid pace.”
In sum, the meeting struck a dovish tone, suggesting that the Fed is getting closer to delivering a rate cut. We continue to anticipate a September start to rate reductions that could lead to a gradual normalization of the policy rate, which ultimately could settle at around 3.50%. In our view, labor market trends could be increasingly important in driving the timing and magnitude of the next policy decision: Acute labor weakness could accelerate rate cuts while a gradually normalizing labor sector would likely lead to a gradual policy adjustment.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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