The Federal Reserve is anticipated to keep interest rates unchanged this week while hinting at a possible reduction in September, as central bank officials aim to signal a shift in their policy stance.
The Federal Open Market Committee (FOMC) is expected to sustain the benchmark interest rate at its current range of 5.25% to 5.5%, a level maintained since last year. The decision will be disclosed following the FOMC’s two-day policy meeting, scheduled to conclude on Wednesday, with an announcement at 2 p.m. in Washington. Fed Chair Jerome Powell will address the media 30 minutes later.
Economists predict that the Fed will recognize progress in inflation toward its 2% target—a crucial condition for rate cuts—given recent moderate consumer price increases in June. Additionally, with a slight rise in unemployment, officials may signal a move toward less restrictive monetary policy.
Subadra Rajappa, head of US rates strategy at Societe Generale, anticipates a shift in the Fed’s statement language to suggest a potential rate cut in September. Rajappa referenced comments from New York Fed President John Williams, who indicated a preference for moving away from restrictive policy measures.
According to Bloomberg News, all surveyed economists expect no change in rates at this meeting. The FOMC’s statement is likely to reflect a more optimistic view on inflation, possibly replacing the term “modest” with “further progress” to describe recent improvements. This could indicate a growing confidence in inflation reaching the 2% target, suggesting imminent rate cuts.
Bloomberg Economics expects only tentative hints of a September rate cut from the July meeting. Chief US Economist Anna Wong notes that communications will likely indicate a potential cut “if data evolve as we expect.”
Despite markets pricing in a high likelihood of a September rate cut, the Fed’s July 30-31 meeting might only preliminarily discuss this possibility. Prominent figures such as former Fed Vice Chair Alan Blinder and Goldman Sachs Chief Economist Jan Hatzius have recently supported a July rate adjustment.
Attention will be on Chicago Fed President Austan Goolsbee, who, as an alternate, may vote against the official decision. This would be the first dissenting vote in over two years, following the retirement of Cleveland Fed President Loretta Mester.
During the press conference, Powell is expected to face questions on the September meeting’s outlook, the pace of future rate adjustments, and his concerns about a slowing labor market. With the unemployment rate at 4.1%, up from 3.4% in early 2023, Powell will likely be queried about thresholds for “unexpected weakening” in the economy.
Investors anticipate a modest rate cut in September and foresee further reductions in November and December, as indicated by futures markets. Powell may also address how such economic conditions would influence decisions on the pace of rate cuts, and whether he expects deviations from the usual 25 basis-point adjustments.
While political questions might arise, Powell is expected to reiterate that the Fed’s decisions are made independently of political considerations.
