The Federal Reserve is finally going to admit it! It is expected to announce a rate cut this week

Due to a favorable shift in US inflation and continued weakness in the labor market, the Federal Reserve is expected to create conditions for lowering borrowing costs this week.

The two-day meeting of the Federal Open Market Committee (FOMC) will end early Thursday morning, at which time the committee will once again keep the benchmark interest rate stable at a 23-year high of 5.25-5.5%. While the rate decision itself may seem uneventful, this meeting will serve as an important platform to further prepare for a policy shift that was first hinted at in September.

Brian Sack, former head of market operations at the New York Fed, said, "The Fed is moving closer to rate cuts, and this week's communication should reflect that."

Fed officials are more open to the idea of rate cuts because there is clearer evidence that, after multiple fluctuations, inflation has finally been brought under control.

In recent months, US consumer price growth has significantly slowed, easing concerns sparked by an earlier setback this year.

At the same time, the US labor market has entered a new phase. Hiring has slowed from its peak, leading to a deceleration in wage growth. Layoffs have been increasing, causing the three-month average unemployment rate to rise by 0.43 percentage points compared to the lowest point in the past 12 months, coming close to the 0.5% trigger point of the Sam rule that marks the beginning of an economic recession.

Officials aim to maintain a healthy labor market and recognize that persistently high policy rates could jeopardize this goal.

The Fed may directly acknowledge these developments in the revised policy statement on Thursday and during the press conference held by Chairman Powell.

As early as June, the FOMC pointed out in a statement that "modest further progress" had been made towards achieving the 2% inflation target, and they were "closely monitoring inflation risks."

Furthermore, the committee has long stated that it "will not consider lowering rates appropriate until it is more confident that inflation is sustainably moving towards its target."

Economists expect the Fed to acknowledge that further progress has been made, with their preferred inflation gauge currently hovering at 2.6%, well below the peak in 2022.

They also believe that the statement will emphasize that rising inflation is not the only risk the Fed faces in a weak labor market. As Powell has emphasized, failure to act promptly to provide relief to US businesses and borrowers could also lead to unnecessary unemployment.

Finally, the FOMC may confirm its increased confidence in controlling inflation and prepare for rate cuts.

Powell and other officials have not yet commented specifically on the timing of the first rate cut, indicating that decisions will be made based on data at each meeting.

Between the July and September meetings, the Fed will receive two sets of inflation and employment reports, as well as other latest information. Forecasts suggest that the incoming information will confirm the necessity of lowering rates.

Some economists believe that given the slowing economy, the Fed's decision to delay rate cuts until September could turn out to be a major mistake Former New York Fed President Bill Dudley said last week: "Although it may be too late to resist an economic downturn by cutting interest rates, the current procrastination increases unnecessary risks."

However, in the eyes of the Federal Reserve, waiting has several benefits.

First, the Federal Reserve has made mistakes in the past, and officials hope to be absolutely sure they have control of the inflation situation before taking any major policy actions.

There are still differing views within the Federal Reserve on the appropriate path for interest rate cuts. In June, policymakers were almost evenly split, with half expecting only one or two rate cuts this year.

Ellen Meade said, "Powell may feel that he cannot really build consensus before September." She served as a senior advisor to the Federal Reserve Board until 2021 and is now employed at Duke University.

She added, "There is a risk of not acting fast enough, but there is also a risk of acting too fast and having to reverse course. Given the early-year rebound in inflation, they may be more concerned about the second risk."

Peter Hooper, Deputy Head of Research at Deutsche Bank, also believes that it is wise for the Federal Reserve to wait until September to start another easing cycle.

He said, if the weakness in the labor market exceeds expectations in terms of speed and magnitude, the Federal Reserve may return to a "neutral" policy environment "quite quickly," meaning no longer suppressing demand.

Hooper, who has worked at the Federal Reserve for nearly 30 years, believes that there is still room for further rate cuts in November and December before remaining on hold until September 2025. At that time, his team expects the Federal Reserve to conduct quarterly rate cuts, gradually bringing policy rates back to between 3.5% and 4%