We expect the Federal Open Market Committee to cut the federal funds policy rate by 25 basis points to a range of 4% to 4.25% at its meeting on Sept. 17 while its dot plot interest rate forecast will imply two additional cuts of 25 basis points, one in October and then one in December.
We expect questions revolving around the Federal Reserve’s independence, stagflation and its dual mandate to drive Fed Chair Jerome Powell’s press conference on Wednesday following the publication of the policy statement, dot plot and Summary of Economic Projections.
While the dot plot is likely to project greater certainty on the timing of additional rate cuts, policymakers will want to convey that those reductions are not a done deal given the move higher in the inflation data.
Since the FOMC last met in July, major downward revisions to monthly labor market growth in addition to rising inflation and a modestly higher unemployment rate underscore the tensions within the Fed’s dual mandate of maximum sustainable employment and price stability.
Job creation has cooled to a three-month average of 29,000 per month compared with 150,000 when the FOMC met in July.
A softer pace of employment growth has prompted some Fed officials to shift their focus to the labor market, and that is the reason why the Fed is preparing to cut its federal funds policy rate by 25 basis points.
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Inflation in the goods sector along with sticky service sector inflation have pushed inflation measures like the consumer price index and personal consumption expenditures index toward 3%.
We expect all the major inflation metrics to exceed that level in the near term, which will prompt the Fed to retain its phrasing of inflation as “somewhat elevated” in its statement.
The major change to the policy statement will be a revision to the employment outlook. We anticipate that the committee will remove the phrase “the labor market remains solid” and replace it with something akin to “a softening labor market.”
The median dot plot will most likely show three 25 basis-point rate cuts this year and another 75 basis points next year, which would reduce the FOMC’s interest rate projection to 3.125%. That rate is consistent with the central bank’s estimate of the long-run neutral interest rate, known as R*, of 3%.
