Fed Keeps Rates Steady in July, Hints at Possible September Rate Cut

Fed Keeps Rates Steady in July, Hints at Possible September Rate Cut 

In July, the Federal Open Market Committee (FOMC) decided to keep interest rates unchanged, but subtly adjusted its statement to leave open the possibility of a rate cut in September. Unlike June's statement, which emphasized a strong focus on inflation risks, the Committee is now considering risks on both sides of its mandate. The latest statement notes "some further progress" towards the inflation target, a slight improvement from June's reference to "modest" progress.

The statement also indicates that the risks to achieving the Fed's employment and inflation objectives are becoming more balanced, whereas in June, these risks were described as "moving towards" better balance. Despite this, the Fed reiterated that it will not consider lowering rates until it is more confident that inflation is moving sustainably towards its target, suggesting that the Committee is still waiting for more favorable data before considering rate cuts.

During the post-meeting press conference, Chair Powell revealed there was considerable discussion about the possibility of reducing rates at this meeting, but a strong majority supported maintaining the current rate (later clarifying that the vast majority believed it wasn't the right time). Powell mentioned that the policy rate remains restrictive and that the time is approaching when rate cuts could be appropriate to support continued economic progress. He also noted that the Fed no longer needs to be entirely focused on inflation, as inflation risks have decreased while employment risks have become more prominent. Powell emphasized that any future decisions would be closely tied to incoming economic data.

Powell was non-committal about potential rate cuts, indicating that rates could be cut multiple times this year or not at all, depending on how the data evolves.

Recent comments from Fed officials have centered around the timing of the next rate cut, with September appearing to be a strong possibility. However, officials continue to stress the importance of data-driven decisions and note that the balance of risks has shifted to include both sides of the Fed's dual mandate, rather than focusing solely on inflation. For example, Bostic (a voting member) recently expressed openness to a September rate cut as inflation cools, noting that price pressures have lessened and that the Fed must also consider its mandate to maintain full employment. Similarly, Kashkari (a voter in 2026) observed that the balance of risks has shifted more toward the labor market and away from inflation.

Since the last FOMC meeting, economic data has been mixed, though some concerns about the labor market and growth have eased. The Fed is increasingly focusing on its dual mandate, not just inflation, and recent data suggests inflation is under control. For instance, July's Producer Price Index (PPI) was lower than expected across the board, while the Consumer Price Index (CPI) met expectations, aside from a slightly lower core year-over-year figure. However, employment data has been less consistent: July's Non-Farm Payroll (NFP) and ISM Manufacturing PMI fell short of expectations, raising recession fears and leading money markets to price in up to 130 basis points of rate cuts by year-end (compared to 66 basis points after the FOMC meeting). Nonetheless, the last two weekly initial jobless claims reports were better than expected, and July's retail sales outperformed forecasts, easing economic concerns and reducing expectations for a large 50 basis point rate cut from the Fed in September.

The minutes from the July meeting are expected to reveal how seriously a rate cut was considered and provide insight into officials' views on the labor market and its impact on monetary policy. However, it's important to remember that these minutes will be somewhat outdated by the time they are released.

Additionally, Chair Powell is scheduled to speak at the Jackson Hole Economic Symposium on Friday, and his remarks are likely to overshadow the minutes, with traders focusing more on his speech to gauge the Fed's likely actions in September. It's worth noting that Jackson Hole has often been a 'sell-the-news' event in recent years.