The Federal Open Market Committee held its policy rate in a range between 4.25% and 4.5% on Wednesday as it slightly opened the door to a rate cut this fall by noting “growth of economic activity moderated in the first half of the year.”
While its statement could not explicitly be called forward guidance, it provides a modicum of flexibility should the labor market deteriorate or inflation remain relatively subdued going into the September meeting.
Still, based on this policy statement and the press conference by Federal Reserve Chairman Jerome Powell, we are keeping our baseline forecast of a 25 basis-point cut at the December meeting intact.
Two members of the FOMC Board of Governors, Christopher Waller and Michelle Bowman, dissented on Wednesday, arguing in favor of a rate cut. It was the first double dissent since 1993.
Those dissents should set the table for a discussion around the wisdom of a near-term rate cut while inflation in increasing.
The consensus forecast for the July personal consumption expenditures index, the Fed’s preferred gauge of inflation, is likely to increase from 2.3% to 2.5%, which underscores the reluctance of the majority on the committee to cut rates.
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In addition, inflation expectations are rising and Congress is debating the merits of tariff offsets. This kind of pricing environment runs the risk of creating a type of demand-pull inflation that central bankers would not look favorably upon.
Economic growth in the first half of the year points to a mild form of stagflation in the second half of the year, which in our view makes it harder for the Fed to pull off a rate cut.
The FOMC’s policy statement noted that uncertainty around the economic outlook remains elevated, which is a nod to the impact of the new trade policies and underscores that the Fed will remain patient as it guides monetary policy toward its estimated terminal rate of 3%.
Powell stressed the need for patience as the Fed waits for more information before it reduces its policy rate, which Powell said was moderately restrictive.
He pointed out that fixed business investment had slowed, and he also noted that the labor market was at or near full employment. These points strongly suggest that the bar remains high for a September rate cut.
Powell laid out the metrics that the Fed is watching—forward-looking inflation expectations—that will provide the difference between tariffs resulting in a one-time increase to the price level or turn into a more insidious form of persistent inflation.
