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The Federal Open Market Committee (FOMC) met this week and voted unanimously to hold rates steady for the eighth consecutive meeting, leaving its policy range at 5.25 percent to 5.5 percent. This decision came as no surprise, with the futures markets pricing in a near-zero percent chance of a rate cut leading up to the meeting.
As we enjoy the back half of summer and continue to evaluate evolving economic conditions, let’s explore how Fed officials approached this most recent decision—and whether the tides could turn leading into autumn.
Warm Weather, Cooling Inflation
If you’re anything like me and the heat of July left you seeking the cool embrace of air conditioning, you’d be forgiven if your electric bill overshadowed the fact that consumer prices have been cooling. The year-over-year Consumer Price Index (CPI) peaked around 9 percent in June 2022. The most recent reading came in even lower than economist expectations and crossed below the 3 percent level for the first time since 2021.
We have also seen interest rates impacting the labor market as intended. Most recently, the unemployment rate ticked up to 4.1 percent in June. With price increases moderating substantially and the labor market becoming better balanced, what kept the Fed from initiating the first rate cut in July?
As we’ve heard time and again, Fed officials acknowledge that things are heading in the right direction, but they want a higher degree of confidence that the trend is sustainable. The last thing they want is a repeat of the 1970s. Back then, the Fed lowered its policy rate as inflation was cooling, only to learn that the move was premature and prices rebounded dramatically. Luckily, recent economic growth has remained resilient in the face of high interest rates. This has afforded Fed officials the flexibility to continue monitoring changing conditions as their confidence levels rise. Even so, there have been increasing calls for rate cuts, with some onlookers concerned the Fed could move too late and risk sending the country into a recession. Through that lens, are we likely to see the first rate cut in the near future?
Balancing Risks
The decision of when to start cutting interest rates is a matter of balancing the risks associated with rates’ impacts on inflation and economic activity. Lower rates too soon and you could risk a rebound in inflation. Lower rates too late and you could risk excessively curtailing economic growth. Finding the sweet spot would result in the so-called soft landing—and that’s what everyone is aiming for. Following this most recent FOMC meeting, the Fed has communicated its belief that we could very well be approaching that Goldilocks zone.
In the FOMC’s written policy statement and Chair Powell’s post-meeting press conference, it was signaled that the Fed has achieved a greater level of confidence since the June meeting. That leads us to believe the first rate cut could come at the September meeting. The futures markets have also been pricing in that expectation. But there is still plenty of time for new data to reveal itself between now and the next meeting. So, Fed officials have rightfully maintained their adaptability and are not committing to any particular course of action. If new signs emerge that point to the stalling of the disinflationary trend, then we could see rates remain steady for a ninth consecutive meeting. Conversely, if recent trends continue, then a rate cut is certainly on the table.
Looking to September
Ultimately, the FOMC maintains its stance of meeting-to-meeting data dependency, so we’ll be keeping tabs on incoming data and additional Fed comments in the weeks and months to come. We plan to continue these post-meeting blogs, so be sure to subscribe to The Independent Market Observer to stay up to date. The next FOMC meeting is scheduled for September 17–18, and we’ll be here to help you digest Fed developments as we progress through the year.
