Welcome news: Powell (left) in an interview with David Rubenstein for The Economic Club in Washington. The Fed chairman is likely to be pressed on the outlook for the next meeting in September, as well as the pace of easing for the rest of this year and next. — AFP
NEW YORK: US Federal Reserve officials are likely to move closer to lowering interest rates from a two-decade high this week by signalling a potential rate cut in September, though they may stop short of providing details beyond that.
The US central bank’s Federal Open Market Committee (FOMC) will keep its benchmark rate in a range of 5.25% to 5.5%, a peak reached a year ago, at the conclusion of its two-day policy meeting, according to economists surveyed by Bloomberg.
Policymakers are likely to acknowledge that inflation has made progress toward its 2% goal – a prerequisite for rate cuts – following tame readings on consumer prices for the month of June.
With unemployment also edging higher, officials will probably indicate it’s appropriate for policy to become less tight soon.
“I think that they are going to change the language in the statement to suggest a cut at the September meeting,” said Subadra Rajappa, head of US rates strategy at Societe Generale.
She pointed to recent comments from New York Fed president John Williams, who “has said that they are looking to move away from restrictive territory – so they could use that sort of language as well”.
All economists surveyed by Bloomberg are looking for no change in rates at this meeting.
In their statement, policymakers are likely to highlight the improved inflation outlook. Instead of saying there has been “modest” progress, as they did in June, the FOMC could say there has been “further progress”.
The committee could also say it has gained some additional confidence that inflation is moving to the 2% target, a signal that it expects rate cuts soon.
Bloomberg Economics said: “Markets have fully priced in a Fed rate cut in September, but the big question for the FOMC meeting is: How clearly will the FOMC signal this?
“We think communications from the July meeting will offer only tentative hints of a September cut, with Fed chairman Jerome Powell noting the potential for a cut ‘if data evolve as we expect’,” said chief US economist Anna Wong.
While investors put the odds of a rate cut this week at under 5%, officials may at least discuss the possibility at the meeting.
A number of prominent voices have recently argued the case for a July move, including former Fed vice-chairman Alan Blinder, Goldman Sachs chief economist Jan Hatzius and former New York Fed president William Dudley.
Some economists said they will be watching to see whether Chicago Fed president Austan Goolsbee, a leading dove, will become the first policymaker in more than two years to cast a dissenting vote against the official decision.
Goolsbee will vote this week as an alternate following the retirement of Cleveland Fed president Loretta Mester in June.
Powell is likely to be pressed by reporters on the outlook for the next meeting in September, as well as the pace of easing for the rest of this year and next.
While he will probably welcome recent good news on inflation, he may also fall back on the Fed’s standard language that its policy path will be “data dependent” and the central bank is plotting moves “meeting by meeting”.
The chairman is also set to be quizzed on his level of concern about a cooling labour market and what would constitute an “unexpected weakening” that would call for a response.
The unemployment rate, at 4.1%, is up from a low of 3.4% in early 2023. Data for July will be published tomorrow.
At the moment, investors are pricing in slightly more than a quarter-percentage point of easing for September, indicating they see some risk of a bigger cut than the typical 25 basis-point increment. — Bloomberg
