July 2024 FOMC Preview
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Latest Fedspeak and Dots
What to look for:
- A hold. While Fedspeak has certainly shifted during the past few weeks, few members are itching to cut rates at the July meeting. While the more dovish side of the committee (notably Williams, Daly, and Kugler) have suggested that rates should come down soon, they’ve still indicated that they don’t believe the Fed is at the point of cuts yet, and that they want to wait just a little bit longer. Only Goolsbee looks like he actively supports a July cut (even if he won’t say it explicitly), but even he’s indicated he doesn’t see a huge difference between July and September. With a good GDP result for Q2 and a benign unemployment claims print just before the meeting, no one will be in a rush to cut.
- Laying the groundwork for a September cut. Enough of the Committee seems like they would be on board with Powell for a September cut, and Powell has an opportunity to signal that in advance. Of course, he won’t make any specific promises and leave optionality in case of another few bad months of inflation. When he did so prior to raising rates in 2022, the phrasing was “it will soon be appropriate to raise the target range for the federal funds rate.”
- Excuses. Besides ourselves, there’s been a growing chorus of voices calling for a July cut, including Alan Blinder, Greg Ip, Bill Nelson, and Bill Dudley. The basic reasoning is the same: inflation has fallen, unemployment has risen—why not make a policy adjustment in response? Expect a lot of questions asking: why not July? With everyone—Powell included—saying the risks have shifted, what justification is Powell going to defend a July hold? Can Powell point to inflationary risks to the upside beyond vague geopolitical risks? We don’t anticipate any convincing explanations, but Powell will need to go through the motions to defend a move that is more the result of institutional inertia than actual data dependence.
The Developments That Matter:
Right after the June FOMC meeting, we got the best inflation news we’ve had since last year: an ultra-soft CPI print that ultimately set up a 13 bps May core PCE print (after all revisions up to today). June’s inflation data was not quite as good but still encouraging, with an 18 bps increase. Under the hood, the details are encouraging, especially with what looks like the beginnings of rent and OER disinflation. This is sufficient progress to set up September, but not quite enough for July.
With the unemployment rate ticking up to 4.1%, the FOMC is finally starting to worry about labor market risk. After a few hotter readings earlier this year, payroll growth has slowed, especially in private-sector jobs. Wage growth continues to drift downwards and recent wage growth is finally in the range that the Fed wants. Growth in wages in job postings is just above 3.1%. The Fed would be comfortable if the labor market entered a holding pattern where it currently is—but they wouldn’t want it to get much weaker.
Fedspeak Highlights
- Powell: On the concern around the risk of unemployment rising further: "Absolutely, I do, even more so than in March than we were here.... labor market conditions have now cooled considerably from where they were two years ago, and I wouldn't have said that until the last couple of readings. And I would say also that... the risks... those are coming much more into balance.”
- Kugler: “I anticipate that it will be appropriate to begin easing monetary policy later this year."
- Waller: "I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view."
- Collins: "I don’t think it’s helpful to overact now… and we’ll receive quite a bit of data between now and September.”
- Goolsbee:
Interviewer: "Do you risk the golden path if you don't cut soon--"
Goolsbee, interrupting: "Yes. Yes." - Daly: "Preemptive action when urgency isn't required is actually where you make mistakes"
- Williams: "I would like to see more data to gain further confidence... We’ve got a few good months now. We had some months that weren’t good on inflation."
What We’re Thinking
The progress in inflation, especially the step-down in rental inflation, combined with the further softening in the labor market means that the risks have shifted substantially. FOMC members will say as much. The question isn’t whether or not the labor market is in dire straits now—it’s not—but where it’s headed if we stay at the current level of rates. The case for a July cut—not to zero, not to neutral, but just the beginning of normalization and recalibrating policy—is pretty straightforward. A July hold looks more like the product of institutional inertia after overreacting to Q1.
Meanwhile, high rates continue to constrain investment in key sectors, which may lead to lower productive capacity and supply constraints in the future.
If the Fed doesn’t cut tomorrow, they should lay the groundwork for a September cut. Given the amount of data that will come out between July and September they should also acknowledge the risk that September could be to late, and open the door to a 50 bps cut at September if the data is sufficiently cool.