FOMC Update: Interest Rate Cut on Hold Until (At Least) September

Details of the Fed Announcement

As expected, the FOMC kept rates unchanged, and its target range remains 4.25-4.50%. The probability of a cut in September was down to just under 50% after the announcement, so about the odds of a coin flip. Overall, the market still expects two 25 basis-point cuts this year and there are three FOMC meetings remaining (September, October, and December).

Lon’s Views

Market expectations are reasonable given the current economic data, but tariff negotiations and the implementation of new, higher rates are still ongoing. While we have a better framework for the game, the players cannot make full decisions until the final rules are in place and they start to see how others, including customers, are reacting.

Inflation could still be coming, and the Fed already lost a rate gamble in this cycle. And in his final months, Chairman Powell certainly doesn’t want to have “fooled twice” as his legacy.

There were two dissensions as expected, Waller and Bowman, who wanted a 25 basis-point decrease. The cynical view is they’re auditioning for the impending Fed Chair opening, particularly in Waller’s case. The more generous, perhaps reasonable, view is that they think the current rate is more restrictive than the other members of the FOMC. And since inflation has not reignited as expected, why wait for unemployment to flare up?

Key Takeaways

Today’s rate decision and recent economic data highlight how difficult monetary policy can be with a dual mandate. A singular price stability mandate would be more straightforward, but in that situation, you would most likely see FOMC members’ arguments for rate hikes.

Recall that June’s dot plot didn’t have any members forecasting rate hikes. If there were a singular mandate, that wouldn’t have been the case. But take the world as it is, and I doubt the dot plot in September will show any increases either. However, with above-target inflation and a stable labor market, I certainly think you could make an argument for it.