FOMC Meeting Preview: The Federal Reserve will not cut interest rates... but should cut interest rates

FOMC July Meeting Preview: Rate Cut Expectations

Preview of the Federal Reserve's July Meeting and Analysis of the US Dollar Trend

Tag: Federal Reserve, US Dollar

Key Points of the FOMC Meeting

• The decline in inflation, rise in unemployment rate, and increase in "real" interest rates all indicate the need for an immediate rate cut.

• On the contrary, it is expected that the Federal Reserve will prepare for a rate cut in September through statements and Powell's press conference.

• The US Dollar Index (DXY) is testing the key level of 104.50--today's closing price will be crucial.

What Should the Federal Reserve Do

About a month ago, I wrote an article titled "Will the Federal Reserve Cut Rates in July? Four Contrarian Reasons to Start Cutting Rates". Since then, we have seen a series of mixed US economic data, with the most prominent being a larger-than-expected decline in CPI in June, so I believe there are still sufficient reasons for an immediate rate cut.

In short, the recent increase in initial jobless claims and the possibility of triggering the "Sam Rule" by the end of the year suggest that the risk balance in the labor market has shifted downwards.

Source: FRED

At the same time, although core PCE may be more "sticky" than the Federal Reserve would hope for in an ideal world, we have not seen year-on-year core PCE inflation rate growth of +0.1% for 11 months. With inflation continuing to decline, the "real" interest rates, adjusted for inflation, are rising month by month. With signs of a slowdown in the US economy in the second half of this year, policy will gradually tighten.

Source: FRED

In other words, inflation is close to the Federal Reserve's target, risks in the labor market are increasing, and even if the Federal Reserve remains idle, real interest rates are tightening, providing sufficient reasons to consider an immediate rate cut.

What Will the Federal Reserve Do

Fortunately, neither you nor I are decision-makers at the Federal Reserve. I expect the Federal Reserve to keep rates unchanged this week. Over the past few months, the central bank has been laying the groundwork for starting a rate cut cycle in September, so Jerome Powell and his team are unlikely to take early action this month On the contrary, it is expected that the central bank will keep interest rates unchanged and use a combination of monetary policy statements and Federal Reserve Chairman Jerome Powell's press conference to prepare for a rate cut in September, but not necessarily commit to a rate cut in advance.

In the statement, the FOMC may choose to remove the word "moderate" from its repeated mention of "made moderate further progress toward the Committee's 2% inflation goal." Similarly, the Committee may also abandon specific calls for price pressures, namely "economic prospects are uncertain, and the Committee remains highly concerned about inflation risks." By removing references to inflation, this would indicate that economic risks are balanced and create conditions for a rate cut. Federal Reserve Chairman Powell can respond to these evolving views at the subsequent press conference.

USD Technical Analysis - DXY Daily Chart

Source: TradingView

From a technical perspective, the US Dollar Index (DXY) is showing signs of forming a potential bottom after briefly breaking below the previous support level of 104.00 earlier this month. A potential inverse head and shoulders pattern has formed on the 4-hour candlestick chart, suggesting that if the closing price can stay above the 104.50 level, it will continue to rebound.

If there is a pullback later today below 104.50, then the range of 104.00-50 from last week will remain unchanged before the FOMC meeting on Wednesday.

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