A September Fed Rate Cut Looks Likely. Then What?

The
attention
today
centred
on
the
Fed’s
next
steps.
In
the
past,
the
central
bank
has
used
“forward
guidance”
as
a
tool
in
monetary
policy,
seeking
to
actively
shape
the
market’s
expectations
of
the
future
path
of
the
federal-funds
rate.
For
example,
the
Fed
made
it
clear
in
the
spring
of
2022
that
massive
interest
rate
increases
were
on
the
way.
This
caused
bond
yields
to
rise,
which
effectively
frontloaded
the
monetary
policy
tightening.

But
since
the
middle
of
2023,
when
the
Fed
ended
its
rate
hiking,
Powell
and
the
Fed
have
been
somewhat
reticent
on
future
policy
decisions.
Instead,
the
mantra
has
been
“data
dependence”
and
“meeting-by-meeting”
decision-making.
The
Fed
does
issue
quarterly
projections
of
the
federal-funds
rate
from
FOMC
members,
but
these
are
tentative
forecasts
and
not
commitments.

Markets
See
September
Rate
a
Near
Certainty

With
that
in
mind,
the
Fed’s
latest
commentary
is
probably
the
clearest
forthcoming
signal
that
it’s
likely
to
cut
in
September.
This
meeting’s
official
statement
included
new
language
that
“the
committee
is
attentive
to
the
risk
to
both
sides
of
its
dual
mandate,”
whereas
prior
statements
focused
on
“inflation
risks.”
Perhaps
most
importantly,
markets
now
assign
a
near-100%
probability
of
a
rate
cut
in
September,
according
to
CME
FedWatch.
Powell
made
no
attempt
to
gainsay
such
predictions.

Federal-Funds
Rate
Target
Expectations
for
September
18,
2024
Meeting

Of
course,
market
projections
are
contingent
on
a
belief
that
fairly
benign
inflation
data
will
continue
to
roll
in.
Powell
said
that
further
confidence
that
inflation
is
returning
to
the
Fed’s
2%
target
will
be
needed
before
cutting
rates,
but
that
the
“second
quarter’s
data
has
added
to
our
confidence”
and
“more
good
data
would
further
strengthen
that
confidence.”

FOMC
projections
from
the
June
meeting
called
for
one
rate
cut
by
year-end
2024
if
the
core
PCE
inflation
rate
reached
2.8%
year
over
year
in
the
fourth
quarter
of
2024.
However,
consensus
projections
are
for
core
PCE
inflation
at
2.7%
by
then,
and
Morningstar’s
forecast
is
2.5%.

PCE
Price
Index
vs.
Core
PCE
Price
Index

On
the
flip
side,
the
labour
market
may
be
weakening
faster
than
the
Fed
anticipated.
The
Fed
had
projected
unemployment
to
reach
4.0%
at
the
end
of
2024,
but
it’s
already
at
4.1%
as
of
June.
All
this
calls
for
more
than
one
rate
cut
by
the
end
of
2024,
meaning
the
Fed
will
most
likely
need
to
get
started
by
September.

More
Fed
Rate
Cuts
To
Follow

Markets
are
now
projecting
three
cuts
in
2024,
taking
the
federal-funds
rate
down
to
4.50%-4.75%
by
December.
Markets
expect
a
further
four
cuts
in
2025,
taking
the
rate
down
to
3.50%-3.75%
by
the
end
of
the
year.
These
expectations
have
fallen
in
recent
months,
converging
closer
to
Morningstar’s
forecast
of
3.00%-3.25%
for
the
end
of
2025.

We
expect
the
federal-funds
rate
target
range
to
ultimately
drop
to
1.75%-2.00%
by
the
end
of
2026.
Our
views
are
driven
by
expectations
that
inflation
will
run
slightly
below
the
Fed’s
2%
target
in
2025
and
2026,
while
unemployment
remains
slightly
elevated.

Federal-Funds
Rate
Target
Expectations
for
December
18,
2024
Meeting

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