FOMC Meeting: Time To Ask When Will US Fed Cut Rates, Not By How Much; Why The Wait?

It is important to know that the US Federal Reserve will cut key fund rates in 2024. The experts are expecting it, and the traders and market too. Even the US Fed themselves are expecting the same. The evidence is available and Fed officials are pleased with the consistent cooling in inflation data, and better-than-expected economic growth. The majority of experts are anticipating the Fed's first rate cut by 25 bps in September 2024 in 3 years, however, the real question is, should the Jerome Powell-led committee wait any further in cutting rates? Will the wait, will be too late? Why not cut rates on July 31?

At present, the US inflation annual rate tumbled for a third consecutive month to 3% in June 2024, which is also the lowest print since June last year. This is also better than estimates. Also, the country's annual core inflation has further slowed to a fresh low since April 2021 to 3.3%.

In the previous policy, the Fed changed its stance from expectations of three rate cuts in 2024 to one rate cut. However, as per ING experts "given the recent data flows and financial market moves, this may already seem out of date."

Nonetheless, ING does not expect a rate cut either from the Fed on July 31. As per the bank, the Federal Reserve will still leave monetary policy unchanged at next week's FOMC meeting, but we believe they will use it to offer the clearest hint yet that they're starting to seriously consider an interest rate cut, most probably at the subsequent September FOMC meeting.

It added, "Inflation is looking better behaved, the unemployment rate is on the rise and there is growing evidence that consumer spending is cooling. The Fed has been striving for a "soft landing" and if the data allows them to cut, and it is certainly moving in that direction, then we think they will seize the opportunity."

A similar opinion is given by the majority of experts. Some believe that the July policy will set the tone for the rate cut in September.

Alex Volkov, Market Analyst at VT Markets said, "The Federal Open Market Committee (FOMC) meeting on Thursday is expected to maintain a dovish tone, keeping rates unchanged at 5.25%-5.50%. This aligns with recent dovish comments from Fed Chair Powell, citing cooler inflation data since June. The market is fully priced for a 25 bp rate cut in September, with 66 bps of rate cuts expected before the end of the year. This meeting could signal that a first-rate cut is imminent, depending on the data."

However, should the Fed wait further for a rate cut when economic indicators are in favour?

In ING's view, both core CPI and the core PCE deflator were running far too hot for comfort in the first quarter, but May and June numbers are looking more encouraging.

Most notably, ING's data highlighted that the so-called "super-core services" that exclude housing, food and energy, on which the Fed have been putting heavy emphasis, have slowed markedly, and hence, it added, "we are finally seeing the key housing components reflecting the moderation witnessed in third-party private rent series."

But why wait? A risk factor for the Fed is the rising unemployment rate in the United States. While the Fed prioritises its objective of achieving a 2% inflation target, the job losses data could not be put aside as well. And it is because of this, that many experts believe it should not be too late for a rate cut.

Greg Mcbride, CFA, Chief Financial Analyst For Bankrate said, "The risk of being behind in calibrating interest rates with the health of the economy is a lot worse when interest rates are on the way down than it is on the way up. The economy could deteriorate quickly, and if they're behind the curve, by the time they get caught up, it's already too late."

Explaining in detail, Ryan Sweet, a chief US economist at research firm, Oxford Economics via its X handler said that the economy is creating a lot of jobs but the steady rise in the unemployment rate will fan concerns about the durability of the expansion. Though these concerns are overdone, the Fed needs to start cutting soon to ensure these jitters don't morph into something worse.

As per Sweet, the Fed is trying to thread a needle and risk management would support a rate cut occurring in September. Hiring has slowed and further declines in the number of job openings risk pushing the unemployment rate even higher. It's taking longer for unemployed workers to find work.

Further, Sweet's note said, "We don't want to discount the message from the unemployment rate entirely. A cause for some concern is that the unemployment rate among job losers is above its trough over the prior 12 months."

Thereby, the Oxford Economics expert added that a steady rise in the unemployment rate among job losers is typically what signals trouble in the labour market and that a recession is approaching.

Additionally, ING believes that growth could become a greater concern for the Fed with risks skewed toward more cuts.

The reason why the Fed could bear the rising unemployment concern is because the rate is at 4.1% currently which is still below the central bank's natural rate of unemployment target of 4.2%.

ING said, "Our position is that the Federal Reserve doesn't want to cause a recession if they can avoid it, and if the data allows, we expect officials to start moving monetary policy from "restrictive" territory to "slightly less" restrictive policy from September. We are getting very close, and assuming things pan out as we expect, the Fed will use the Jackson Hole symposium to show they're re-evaluating the outlook and will be cutting their growth and inflation forecasts and raising their unemployment projection in September."

Yet, ING has not changed its estimate of a rate cut to start from September. The bank sees three rate cuts in 2024, and another three in 2025.

ING added, "This, we believe, will pave the way for three rate cuts this year in September, November and December, with at least three more next year."