Federal Reserve Chairman Jerome Powell addressed questions from reporters at a news conference following a Federal Open Market Committee (FOMC) meeting at the William McChesney Martin Jr. Federal Reserve Board Building on July 31, 2024, in Washington, DC.
Federal Reserve meetings typically follow a predictable pattern, with policymakers signaling their intentions ahead of time and markets responding accordingly. However, this week’s FOMC meeting is cloaked in uncertainty. While the consensus in financial markets leans toward an interest rate cut, the extent of the reduction remains a point of contention. The debate focuses on whether the cut will be the standard 25-basis-point decrease or a more aggressive 50-basis-point reduction.
This divergence of opinions among Fed watchers suggests that this FOMC meeting could be particularly significant. The meeting concludes on Wednesday afternoon, with the rate decision being announced at 2 p.m. ET.
Mark Zandi, chief economist at Moody’s Analytics, expressed a preference for a 50-basis-point cut, arguing that current rates are too high given that the Fed has met its mandates for full employment and inflation targets. He believes a quick normalization is necessary.
Market pricing in derivatives around the Fed’s potential actions has been erratic. Until late last week, traders anticipated a 25-basis-point cut. However, sentiment shifted on Friday, considering a 50-basis-point cut as a viable option. As of Wednesday afternoon, fed funds futures traders estimated a 63% probability for the larger cut, indicating a lower level of certainty compared to previous meetings. One basis point is equivalent to 0.01%.
Many analysts on Wall Street predict a more cautious first step by the Fed. Tom Simons, a U.S. economist at Jefferies, highlighted the unpredictability in the tightening phase, suggesting that any easing policy should be approached with the same caution.
Former Dallas Fed President Robert Kaplan anticipates a split within the committee, with some officials advocating for a swift approach to avoid future economic chasing, while others prefer a more cautious, risk-managed strategy.
The Fed’s benchmark fed funds rate has remained in the 5.25%-5.5% range since July 2023, marking a 23-year high. This decision persists despite a drop in the Fed’s preferred inflation metric from 3.3% to 2.5% and a rise in the unemployment rate from 3.5% to 4.2% during the same period. Recent statements from Jerome Powell and other policymakers have made it clear that a rate cut is imminent, but the exact amount will be influenced by the dual objectives of fighting inflation and acknowledging a significant slowdown in the labor market.
Seema Shah, chief global strategist at Principal Asset Management, highlighted the Fed’s dilemma: weighing the risks of potentially reigniting inflation against the risk of inducing a recession if the cut is limited to just 25 basis points.
Equally important to the rate cut will be the Fed’s forward guidance, conveyed through the “dot plot,” which outlines officials’ projections for rates over the coming years. The September plot will be the first to include an outlook for 2027. In June, FOMC members foresaw just one rate cut through the year-end, a forecast likely to be revised given the market’s expectation of up to five cuts by the year’s end.
The FOMC’s Summary of Economic Projections will accompany the dot plot, providing unofficial forecasts for key economic indicators. The unemployment forecast is expected to increase from June’s 4.0% year-end projection, aligning with the current 4.2% rate. Core inflation, previously pegged at 2.8% for the full year, may also be revised lower based on recent trends.
Adjustment to the FOMC’s post-meeting statement is anticipated to reflect the rate cut and updated forward guidance. The market will first react to the statement and SEP releases at 2 p.m. ET, followed by Powell’s press conference at 2:30 p.m.
Goldman Sachs predicts the Fed will adjust its statement to convey greater confidence in managing inflation, balance the risks to inflation and employment, and re-emphasize its commitment to maintaining maximum employment. Tom Simons suggests that specific forward guidance may be limited, given the Fed’s current uncertainty about its future actions.
