Federal Reserve July interest rate decision: Key window for rate cut opens before the meeting!

At 2 a.m. on Thursday Beijing time, the Federal Reserve will announce its interest rate decision for July. Although some economists believe this month is the best time to start cutting interest rates, financial market participants think the probability is almost zero, and the Fed is expected to lay the groundwork for a rate cut in September by modifying its statements on inflation, employment, and forward guidance.

Recent economic data in the United States has been encouraging, with a slowdown in price increases and a slight cooling in the job market, but economic growth remains strong. However, the Fed still wants further confirmation that inflation can sustainably fall to the 2% target. The risks of the Fed's dual mandate of maximizing employment and stabilizing prices have become more balanced, with officials hoping to curb inflation without causing unnecessary harm to the labor market by maintaining high rates in the long term.

Probability of Rate Cut in July Almost Zero

The federal funds rate target range is currently within 5.25%-5.5%, and the last rate hike by the Fed was in July 2023. Most economists surveyed by FactSet expect the Fed to keep rates unchanged until the September meeting.

U.S. inflation continues to cool, indicating a gradual slowdown in the rise of prices for goods and services since reaching a peak in 2022. At the same time, the Fed closely monitors employment data. There are signs that U.S. employment is cooling down, as desired by the Fed. Over the past three months, the U.S. has added an average of 177,000 jobs per month, which, although stable, is significantly lower than the 275,000 jobs added a year ago. Additionally, the unemployment rate has risen to 4.1%, the highest since November 2021.

Powell and other Fed officials have emphasized that their concern about slowing employment is almost as significant as their concern about inflation. The Fed is gradually shifting its focus to ensuring that the labor market does not weaken excessively, boosting market expectations for a rate cut. This has led some economists to believe that delaying the rate cut until September would be a mistake.

However, Peter Hooper, Deputy Head of Research at Deutsche Bank, believes that waiting until September to start the easing cycle is a cautious approach. He stated that even if the labor market weakens faster and more significantly than expected, the Fed can "fairly quickly" return to a "neutral" policy setting.

Goldman Sachs economist David Mericle noted in a report, "Employment growth has been on a downward trend, as Chairman Powell has repeatedly pointed out last month, further weakness in the labor market is unwelcome." He pointed out that an early rate cut may help ensure stability in the job market.

Jacob Channel, Chief Economist at LendingTree, said, "Currently, a slight 25 basis point rate cut may occur in September. If things progress smoothly, we might even see the Fed cut rates twice more by the end of 2024, each time by 25 basis points." However, he cautioned, "Nevertheless, a rate cut is far from certain. Remember, the Fed's goal is to quickly adjust policy in case of unexpected developments

FactSet data shows that slightly more than half of economists predict that by the end of this year, the Federal Reserve will cut the benchmark interest rate to the range of 4.5%-4.75%.

## Changing Wording to Hint at Rate Cut

Although a rate cut is unlikely in July, the interest rate decision seems flat, but **this meeting will provide an important groundwork for the shift in monetary policy in September.**

Brian Sack, former head of the New York Fed's markets group and head of macro strategy at Balyasny Asset Management, said, **"The Fed is getting closer to cutting rates, and this week's communication should reflect that."** There is clear evidence that after several stops and starts, inflation has finally been brought under control, making officials more receptive to the idea of a rate cut.

So far, Powell and other officials have refused to make a clear statement on the timing of the first rate cut, instead indicating that decisions will be made based on the latest data at future meetings. Analysts believe that this meeting may be different, with the **Fed possibly hinting at a rate cut through changes in wording in the policy statement and press conference.**

Back in June, the Fed stated that it had made "modest further progress" toward achieving 2% inflation but still had "heightened concerns about inflation risks." Additionally, it has long maintained that it does not see a rate cut as appropriate until it has "greater confidence that inflation will move sustainably" towards the target.

Economists expect that **the Fed will acknowledge at this meeting that inflation has made further progress,** with its preferred PCE inflation gauge currently hovering at 2.6%, well below the peak in 2022.

They also believe that the policy statement at this meeting will emphasize that as the labor market has begun to weaken, **rising inflation is not the only risk the Fed faces, and the risks facing its dual mandate are becoming more balanced.**

At the press conference held at 2:30 a.m., Powell is expected to reiterate confidence in the process of inflation falling, emphasizing that cutting rates too early or too late are risks, but may continue to avoid committing to specific policy actions in advance. During the Q&A session, Powell may provide detailed explanations of the latest Fed officials' stance on rate cuts.

**Although the Fed may hint at a rate cut in September, the market has already digested a more aggressive easing path.** For U.S. stocks, the trend in the coming months may still be volatile. In election years, U.S. stock indices typically rise in early August and then fall in September and October. A rate cut by the Fed may bring a brief rebound, but considering the widespread expectation of a rate cut in the market, this optimism may not last.

Furthermore, even if the Fed cuts rates, the downside potential for the U.S. dollar may not be significant. The possibility of a rate cut in September has already been fully priced in by the market, and considering the uncertainty of the inflation outlook, **the Fed's dovish remarks may be "in short supply," potentially reinvigorating the dollar in the medium term.**