Fed preview: setting the stage for September rate cut

​​​What to expect at this week’s meeting

​The Federal Open Market Committee (FOMC) is widely expected to keep interest rates unchanged at 5.25 - 5.50% at its July meeting. This would mark the eighth consecutive meeting without a rate change and a full year since rates reached their peak.

​Focus shifts to possible easing in September

​While no immediate action is anticipated, the Federal Reserve (Fed) is likely to signal a shift towards easing monetary policy. Markets are pricing in an 87% chance of a rate cut by September and over 50 basis points of total easing by year-end.

​Factors supporting potential rate cuts:

1. Inflation progress

​Recent data shows encouraging signs of disinflation:

• ​Headline consumer price index (CPI) rose 3% year-over-year (YoY) in June, the slowest in a year
• ​Core CPI increased 3.3% annually, the lowest since April 2021
• ​'Supercore' inflation declined for the second straight month

2. Labour market softening

While still resilient, the job market is showing signs of cooling:

• ​Three-month average job gains slowed to 177,000
• ​Unemployment rose to 4.1%, highest since November 2021
• ​Initial jobless claims reached a two-year high

​3. Tightening policy stance

​The real federal funds rate has risen to around 4.7%, the highest level since late 2018, indicating an increasingly restrictive policy.

​4. Communication strategy

​The FOMC is expected to:

• ​Acknowledge greater progress towards the 2% inflation target
• ​Note increasing labour market fragility
• ​Signal that risks to the dual mandate are becoming more balanced

​5. Chairman Powell's press conference

​Jerome Powell is likely to:

• ​Reaffirm confidence in the disinflationary process
• ​Emphasise that risks are now "two-sided"
• ​Avoid pre-committing to specific policy actions

​What does this mean for markets?

​While the Fed may signal a September cut, markets already price in a slightly more aggressive easing path than is likely to be the case. However, reaffirmation of the "Fed put" should support risk assets, with equities potentially seeing continued upside.

​For US stocks, the path over the next few months remains choppy. US indices typically rally into early August in election years, before easing off through September and into October. A Fed rate cut might provide a brief bounce, but given how widely-expected it is the optimism may not last.

​However, from late October seasonality turns positive, and the ‘traditional’ year-end rally gets underway. This is, of course, just a guide, but with earnings still strong and no recession in sight, the rest of the year may follow the traditional course.

​A Fed rate cut may not mean too much downside for the US dollar, either. September’s likely move has been well-telegraphed, and given the uncertainty around inflation, the Fed may not be too keen to cut again in a hurry. Therefore dovish commentary may be in short supply, potentially boosting the dollar in the short to medium term.