Summary
The Federal Reserve made no changes to monetary policy at the July meeting as expected. Chair Powell avoided any pre-commitment but strongly opened the door for interest rate cuts starting in September. The Fed sees scenarios ranging from “zero to several cuts this year,” with the focus on the risk of a sharp deterioration in labor market conditions. However, there is no reason to panic yet.
The core inflation trend calls for a series of cuts at a measured pace, reaching (3.375%) by mid-2026. In the July meeting, the FOMC kept interest rates steady for the open market but also stated that the economy is approaching the point where it would be appropriate to lower interest rates. During the press conference, Powell emphasized that the economy does not need further weakening to justify an easing cycle; instead, the key factor would be confidence in the sustained downward trend of inflation. The committee still believes it has enough time to assess the pace and risks of inflation.
As for the unemployment rate, it has risen but remains generally low. In the press conference, Powell also highlighted that domestic demand growth has so far remained healthy in 2024. Therefore, further progress toward the committee’s inflation target (2%) is desirable in the third quarter before policy easing begins.
The indications suggest that since June 2023, the annual Consumer Price Index (CPI) has remained within the range of (0.8%-2.3%) annually, averaging below (2.0%) annually. Inflation expectations are now aligned with the one-year average over the past decade.
According to the Employment Cost Index, wage growth is converging to a pace consistent with maintaining inflation at the (2.0%) annual target.
Despite the underlying strength of the economy, economic prospects remain uncertain. The committee is attentive to risks on both sides of its dual mandate. This marks a change from the previous statement’s language, which highlighted inflation risks alone.
During the press conference, the Chair confirmed that the FOMC has the ability to adjust the pace of easing as necessary. Currently, the market is focused on downside risks to the labor market, which have been highlighted throughout 2024. However, next year, if the economy’s underlying strength holds, inflation risks are likely to resurface. Domestic capacity constraints in the United States are real and could be permanent, while trade policy poses a real threat.
We still expect the first cut in September, followed by one cut per quarter from Q4 2024 to Q2 2026. Compared to the FOMC’s long-term estimate of 2.8%, our outlook for the potential trend in neutral interest rates is slightly higher. It is best to consider the cycle’s endpoint as somewhat restrictive. We see it as unlikely that policy will return to a neutral or expansionary stance unless consumer growth weakens significantly.
