July 2024 FOMC Meeting Postmortem

The Fed held rates steady today, but signals from their statement and Chair Powell's remarks suggest a possible rate cut in September.

Today the Fed again kept rates unchanged but used the post-meeting statement and press conference to signal that it is close to start reducing the Fed funds rate. This likely will happen at the September FOMC meeting, but today’s signaling left open the option to start rate cutting later this year instead.

Key takeaways:

• The FOMC again kept the Fed funds target rate unchanged at 5.25%-5.50%. Similarly, there was no change in the pace of reductions of the Fed’s holdings of Treasury and mortgage-backed securities

• The statement following the rate decision signaled a bias to lower rates at some point in the near future, as the Fed’s focus is now on both sides of its dual mandate.

• A September rate cut is the modal expectation, but there’s a risk that the Fed will again not move in September. In the former case, I expect 2 cuts in total for 2024, whereas in the latter I would expect at most 1 cut this year.

Decision, Post-Meeting Statement and Post-Meeting Press Conference

As expected, the FOMC decided to keep the Fed funds rate target range at 5.25%-5.50%. There were some notable changes to the post-meeting statement compared to the June meeting:

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong moderated, and the unemployment rate has remained low moved up but remains low. Inflation has eased over the past year but remains elevated somewhat elevated. In recent months, there has been modest some further progress toward the Committee's 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year continue to move into better balance. The economic outlook is uncertain, and the Committee remains highly is attentive to the risks to both sides of its dual mandate attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee 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 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Austan D. Goolsbee; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller. Austan D. Goolsbee voted as an alternate member at this meeting.

FOMC Statement, July 31, 2024 (with annotations relative to June FOMC statement).

As becomes apparent from the annotated statement above (with highlighted differences relative to the June statement), the Fed emphasized more the cooling in the labor market compared to still elevated inflation rates than in June in assessing the economy. The Fed still views inflation as elevated but less so than before, but also viewed the progress on inflation between June and July as less substantial than between May and June.

When it comes to future policy rate decisions, instead of choosing a more explicit positive rewording of the sentence regarding the future Fed funds rate, as I suggested in my FOMC preview earlier this week, the Fed signaled that from here on policy rate decisions are based on symmetric risks to both inflation and employment and emphasized progress on achieving its dual mandate. My reading is that indeed the Fed is close to rate cuts, but it definitely is not a slam-dunk that this will happen at the September meeting. Either satisfactory inflation progress between today and the September FOMC meeting, or a sharp labor market deterioration over that same period will be the driver behind such a September rate cut.

Chair Powell’s remarks at the post-meeting press conference generally confirmed the above outlined interpretation, with the Chair noting the Fed no longer needs a “singular focus” on the bringing inflation back to target, given progress on inflation, and the need to avoid “excessive” slowing in the labor market. Within in this context Chair Powell emphasized that incoming data that contradicts the current FOMC outlook, as outlined in the June Summary of Economic Projections (SEP), would deter the Fed from cutting rates at its September meeting. And this June SEP already penciled in an upgrade in the core PCE inflation projection in Q4 from 2.6% (Q4/Q4) in March to 2.8%. As such, a September rate cut should be the modal outlook (as I outlined in my preview) but today’s signaling gives the Fed an “out” to keep rates unchanged. So, a 75% probability of a September rate cut instead of 100%.

Beyond Today’s Meeting

In my July FOMC preview I noted the slower progress in the recent PCE inflation data, with underlying near-term inflation trends stable around 2.8%. I suspect that gradual continued progress in these underlying inflation data would be enough for the Fed to adhere to its Fed funds projection of two cuts in 2024, if the rate cutting starts at the September meeting.

Indeed, with current nominal rate pricing and the (still elevated) “Main Street” inflation expectation at around 2.7%-2.75%, the perceived policy stance of the Fed has aligned well with how the Fed sees the restrictiveness of its stance for the year ahead (chart above).¹ This likely confirms that the Fed is on course for a September rate cut.

For the remainder of the year I see three scenarios for the Fed:

1. Gradual inflation progress between the July and September FOMC meetings combined with gradual labor market cooling means the economy is evolving in line with the July SEP and the Fed will cut in September, followed by a second cut in December as the Fed aims for a “less restrictive stance” rather than “a timely return to neutral”.

2. Inflation progress between the July and September FOMC meetings disappoints but labor market cooling remains gradual means no policy rate change in September. The Fed will then want to await more data AND wants to avoid starting a rate easing cycle at the November meeting, so close to election day.

3. Gradual inflation progress between the July and September FOMC meetings but the labor market deteriorates too rapidly means the Fed will cut in September, November and December.

I place 75% probability on scenario 1, 20% on scenario 2 and 5% on scenario 3, as I think underlying household spending remains robust enough to keep economic growth close to trend or slightly above even, and the labor market cooling back to trends suggests stabilization of labor market dynamics is on the horizon.

1. See the note I published back in August 2023 for more details about the construction of this metric.