Fed preview: setting the stage for September rate cut
This week’s Fed meeting is not expected to see any easing, but is widely-expected to open the door to a Fed rate cut, something markets have been waiting for all year.
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.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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