The FOMC is widely expected to sit on its hands and keep rates steady at 4.25% – 4.50% on Wednesday. Officials are mainly in wait-and-see mode in light of trade uncertainty, a still resilient labour market, and inflation data not yet being majorly impacted by tariffs. There is no new dot plot or summary of economic projections – that comes next in September, when policymakers will have another two more CPI and NFP reports to digest, and likely can then make a more informed rate decision. This meeting might simply be a holding one as Chair Powell stresses a patient approach.
Most Fed officials have made their stance quite well known in recent weeks. They remain comfortable with the underlying health of the US economy and continue to believe there may be cause for mild concern over inflation, particularly from the impact of the White House’s trade and immigration policies. There could be a couple of dissenters to the decision, Waller and Bowman, who believe an early rate cut is warranted. But Chair Powell is likely to stress the data dependent stance, flying against those who are expecting him to line up a September rate cut.
Recent data
Inflation has been relatively well behaved recently with the latest core print at 0.2% m/m. But most economists and rate setters believe the next data releases in July, August and September could show a bump in prices. This is likely playing on their minds, especially after incorrectly pronouncing rampant post-pandemic price pressures as ‘transitory’, as they hit 9% in 2022.
But the Fed has a potentially tricky decision going forward, as other indicators are flashing a slowing economy ahead. Consumer confidence has weakened, spending is stalling and there are worries about a cooling labour market. On the flip side, we should get solid GDP figures out tomorrow showing around 2.5% growth for the second quarter.
This week will see the usual and timely pre-NFP jobs data to inform on the labour market. Policymakers will need to balance any softness here, with tariff, fiscal and immigration issues which could ultimately mean higher inflation but also higher unemployment. That will conflict with the Fed’s dual mandate of maximum employment and price stability.
Market reaction
Money markets are now pricing in around 18bps for the FOMC September meeting, and 44bps by year end. If rate setters stand pat this week, there will be just three more meetings with two 25bps rate cuts expected. How this tallies with the current data dependent approach remains to be seen and will be the key driver of the dollar and potentially stocks markets too. One of the drivers of the rebound rally higher in risk assets has been expectations of policy easing.
The dollar has been enjoying some buying over the last few days as it looks to decisively break out of its long-term bear channel, after hitting multi-year lows at the start of July. The Dollar Index broke above its 50-day simple moving average on Monday which has acted as resistance this year. The next key level to the upside is a long-term low from July 2023.