During the recent July meeting, Chairman Jerome Powell hinted at the possibility of a rate cut in the near future, citing favorable inflation data as a key factor in the decision-making process. While the specifics were not outlined, Powell’s comments suggested that the bar for a rate cut in September is relatively low, according to Goldman Sachs economists. The Fed Chair highlighted recent labor market changes, such as an increase in the unemployment rate, as signs of normalization rather than significant weakening. This indicates that the FOMC is closely monitoring economic data and is prepared to take action when needed.
Goldman Sachs economists believe that even acceptable inflation data in July could lead to a rate cut in September, with the possibility of rate cuts occurring every other meeting thereafter. Citi economists emphasized the importance of labor market data in influencing the Fed’s decisions. They highlighted the diminishing upside risks to inflation and the growing downside risks to the labor market. Powell referenced the Sahm rule, which historically signals a downturn when the three-month moving average unemployment rate increases by 0.5 percentage points, as a statistical regularity rather than an economic rule. Both Goldman Sachs and Citi economists expect a rate cut in September, with Citi projecting additional cuts in subsequent meetings.
The FOMC made minor adjustments to its statement to reflect the current economic conditions, specifically noting the rise in the unemployment rate and the slowing progress toward 2% inflation. The statement now acknowledges that the unemployment rate has increased but remains low, while the progress toward the inflation target is described as “some further progress.” The Committee also highlighted the risks on both sides of its dual mandate, indicating a balance between employment and price stability concerns. This shift in focus formalizes Chair Powell’s previous statements on the importance of achieving a balance in meeting the Fed’s mandates.
Both Goldman Sachs and Citi economists foresee a series of rate cuts by the Fed, aiming to reach a terminal rate of 3.25-3.50% by 2025. Citi notes that the market is already pricing in the expected rate cuts, as evidenced by the decline in front-end Treasury yields. This suggests that the market anticipates the three 25 basis point rate reductions projected by Citi for the remainder of the year.
The Federal Open Market Committee’s consideration of a rate cut in response to recent labor market changes reflects its commitment to maintaining economic stability. The nuanced approach to policy adjustments, as indicated by Chairman Powell’s comments and the economists’ projections, underscores the importance of careful monitoring and analysis of economic data. As the Fed continues to navigate evolving economic conditions, market participants will closely watch for further developments and potential rate adjustments in the coming months.