The Federal Reserve is about to start "preheating" rate cuts, pay attention to these details!

The Federal Reserve began its two-day meeting on Tuesday local time, theoretically marking the start of the long-awaited rate-cut cycle on Wall Street. Analysts are not concerned about the outcome of this meeting; instead, they are trying to find clues about the future rate-cutting path.

Many have firmly set their sights on a rate cut in September, hoping that the July meeting will reveal some insights from the Federal Open Market Committee (FOMC) members to support this view.

Given the Fed's unusual balance so far in combating inflation and avoiding economic recession, speculation about when and to what extent the Fed will cut interest rates is rife.

On one hand, some hope that Powell and his colleagues will cut rates before the third quarter. Others still do not believe that the economy will cool sufficiently before September, thus proving the rationale for a potential rate cut that could reignite inflation.

After inflation peaked at 9.1% in June 2022, the Fed has been working to lower inflation, with the benchmark interest rate currently at its highest level in over 20 years. Powell's task is to achieve a "soft landing" for the U.S. economy, avoiding further price spikes while keeping the U.S. economy recession-free.

Although former President Trump hinted that the Fed should not cut interest rates before the November election, this concern has been set aside by Wall Street.

Brian Rose, a senior U.S. economist at UBS, is one of those who firmly believe that the Fed is about to cut rates. In a report, he wrote: "The market currently expects the Fed to cut rates two or more times by the end of the year, with the likelihood of a rate cut in September close to 100%."

Rate-cut hints hidden in the details

Goldman Sachs analysts will closely monitor every word in the FOMC's policy statement in July.

David Mericle, chief U.S. economist at Goldman Sachs, wrote in a statement released on Monday: We expect the FOMC to amend its statement, hinting that a rate cut is closer at the July meeting.

Mericle expects the statement to say "the unemployment rate has 'edged up slightly but remains low'. This will change the wording from the June statement, which said the unemployment rate "remains low."

Mericle also expects that for the wording in the June statement that the economy "has made moderate further progress toward the 2% inflation target," the FOMC may drop the word "moderate" and use a more confident "further progress" at this meeting.

The third adjustment may be "the risks around the dual mandate (employment and inflation goals) are 'in' better balance" instead of 'have moved to' better balance. Finally, he wrote: "The FOMC now only needs to 'slightly' increase confidence in the inflation outlook to cut rates."

This final wording update will differ from the June statement, which said: "The Committee believes that it is inappropriate to cut rates until it has greater confidence that inflation will continue to move toward 2%." Goldman Sachs' revision of the interest rate cut expectations for July supported its view of a rate cut a few months later. Merrick added, "We still expect the first rate cut in September, followed by quarterly cuts. We believe that the risk of the Fed's rate cut path is slightly more positive than our quarterly rate cut benchmark forecast, but not as aggressive as implied by market pricing."

A large amount of data is about to be released

Jeremy Siegel, a professor at the Wharton School, agrees with the idea of a rate cut by the Fed in September, but the University of Pennsylvania finance professor is not as confident as some analysts.

Siegel, as a senior economist at WisdomTree Asset Management, wrote in his weekly commentary, "I expect Powell to indicate that if current economic trends continue, there is a possibility of easing monetary policy in September. He is unlikely to fully commit to emphasizing this, as there is still a lot of data before the September meeting, but the Fed's confidence in the inflation trajectory should be strong enough to start cutting rates."

One factor that experts will focus on is initial jobless claims. Siegel stated that initial jobless claims have "stabilized." Bill Dudley, former president of the New York Fed, pointed out that initial jobless claims are now close to triggering the Sam rule.

The Sam rule refers to a recession possibly starting once the current three-month moving average of the unemployment rate exceeds the lowest three-month moving average of the past 12 months by 0.5% or more. According to Fed data, the current reading is 0.43%.

Therefore, Dudley wrote for Bloomberg this week that he would like to see Powell cut rates at this week's meeting rather than wait until September, as the unemployment rate may rise by then.

However, the heat of other data may be enough to offset these concerns, and may even be strong enough to make Powell abandon the rate cut in September.

Siegel pointed out that the Personal Consumption Expenditures (PCE) price index "shows a slight increase year-on-year," and more broadly, the inflation rate is still at 3%, although it has dropped to the lowest point this year, it is still well above the 2% target.

He added, "The market is even starting to price in the possibility of a 50 basis point rate cut in September, as I have mentioned in previous comments, but this would only happen in the case of a sharp economic slowdown, which the current initial jobless claims data does not point to."