The latest Fed preview by Wall Street Journal Fedwatcher Nick Timiraos suggests that there may be a potential rate cut in September, although no leaks have been confirmed yet. The Fed seems to be preparing for a cut without making any definite commitments. This aligns with the consensus view that a rate cut in September is highly anticipated, with some speculating about the possibility of a 50 basis point cut.
The readiness of the Fed to consider cutting rates is influenced by several factors, including positive developments in inflation, indications of a cooling labor market, and a reevaluation of the risks associated with high inflation versus economic weakness. Core inflation has decreased to 2.6% in June from 4.3% a year ago, while the unemployment rate has risen to 4.1% in June from 3.7% at the end of last year.
Despite these indicators, Fed officials are unlikely to make any changes to interest rates at the upcoming July meeting. However, they may signal the possibility of a rate cut in September. There is a growing concern among officials about waiting too long to act and potentially missing the opportunity for a smooth economic transition.
Various Fed officials have expressed their views on the current economic conditions. New York Fed’s Williams has hinted at a future decision to lower rates, while Fed’s Waller believes that the labor market is in a good position and needs to be maintained. Chicago Fed’s Goolsbee has suggested that there may be a case for rate cuts given the previous tightening measures.
San Francisco Fed’s Daly, on the other hand, has cautioned that price stability has not been achieved yet. While the Fed may not provide clear signals in their upcoming statement, even small indications could be interpreted as confirmation by the market, which has already priced in a rate cut for September.
Looking ahead, the Fed could consider pushing back against the 100% market pricing for a September rate cut to maintain flexibility, especially in light of the recent strong GDP report. It remains to be seen how the Fed will navigate the delicate balance between inflation concerns and the need to support economic growth in the coming months.
