Investors are focusing on the Federal Reserve’s September meeting, when the central bank is expected to begin cutting interest rates, which Fed Chairman Jerome Powell said would mark a “significant” shift in policy from a pandemic-era inflation-fighting tightening cycle to an easing phase.
The ultimate course is uncertain; changes in supply and investment patterns during the pandemic, new geopolitical tensions, and even a tariff war from a potential second Trump administration could make it as difficult for the Fed to exit high interest rates as it is to fight inflation. But at least the first rate cut seems imminent.
However, whether September is the starting point for a rate cut will depend on whether the data is close to Fed officials' expectations, including whether inflation continues to fall to the Fed's 2% target and whether the labor market remains roughly balanced with moderate wage and monthly job growth.
The Fed is expected to keep its benchmark interest rate in a range of 5.25% to 5.50% at its July meeting, but its new policy statement could also change its description of the economy and outlook, laying the groundwork for a rate cut in September.
The interval between the Fed's July and September meetings is seven weeks, one week longer than usual, which will allow the Fed to get more data. At the same time, the Kansas City Fed will also host the Jackson Hole Central Bank Annual Conference, a venue often used by the Fed chairman to deliver policy-related speeches. In a recent interview, New York Fed President Williams said, "We will actually learn a lot between July and September."
Will the anti-inflation process continue?
After initially downplaying the inflation shock caused by the epidemic as "transitory," the Fed launched the fastest rate hike cycle in history starting in March 2022, as policymakers accepted the view that price pressures would persist and began to worry about losing public trust.
The Fed raised its benchmark interest rate by 525 basis points over 12 policy meetings, an average of nearly 50 basis points per meeting, including four consecutive 75 basis point increases, which were intended to signal to the market the Fed's determination to control inflation.
The Fed’s policy rate reached roughly the same level in July last year as it did before the 2007-2009 financial crisis, and then remained unchanged for a long time. The duration of this “restrictive” interest rate period is likely to be at the median level of the Fed’s recent rate hike cycles.
That’s because officials got a positive surprise on inflation last year, when supply chains and labor markets began behaving more like they did before the pandemic. A large portion of the inflation shock did turn out to be “transitory,” just at a slower pace than policymakers initially expected.
Ahead of their upcoming July policy meeting, Fed officials have said they believe inflation is likely to continue to slow and that a rate cut would be appropriate if it does.
According to the PCE price data favored by the Federal Reserve, the U.S. PCE price index grew 2.6% year-on-year in May. Many economists expect that the year-on-year growth rate of the PCE price index, scheduled for July 26, will drop to 2.5% or lower.
Then, before the September meeting, policymakers will get July’s PCE price index on Aug. 30, and July and August CPI data on Aug. 14 and Sept. 11. Despite concerns earlier this year that inflation was picking up, recent data suggest it is slowing again.
Can the labor market remain stable?
Powell recently described the labor market as “equilibrium,” meaning the number of available workers is roughly balanced by businesses’ demand for labor; the monthly flow of new hires and quits is consistent with population growth; and wage growth is consistent with the Fed’s inflation target.
The current unemployment rate of 4.1% is about the level that Fed officials believe is sustainable over the long run with inflation at 2%, and policymakers hope they can end the inflation fight and start cutting interest rates without causing a big rise in unemployment.
The upcoming nonfarm payrolls report will be used by officials to confirm that rising wages and labor shortages no longer pose an inflation risk, which could influence the size and pace of future interest rate cuts by the Federal Reserve if signs of a labor market recession are severe enough.
The unemployment rate is currently rising steadily from last year's historic low of 3.4%, and some Fed officials have noted that unemployment tends to rise suddenly and sharply after an initial slow increase.
Before the September meeting, officials will get nonfarm payrolls reports for July and August on Aug. 2 and Sept. 6, respectively. While weekly jobless claims data has been rising, the data is volatile and heavily influenced by seasonal factors.
Reports on job opening levels and worker departures for June and July are due on July 30 and Sept. 4, respectively.
Job openings and labor turnover survey data have played a surprisingly important role in recent Fed discussions about how the pandemic has distorted the job market. With the ratio of job openings to unemployed people and other aspects of the report returning to pre-pandemic levels, the job openings and labor turnover survey reports have shaped officials’ views on how unemployment might start to rise after the Fed has pressured the economy for too long.
Article forwarded from: Jinshi Data
