Federal Reserve Chairman Jerome Powell addressed reporters during a news conference held after 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 are typically characterized by predictable outcomes. Policymakers usually signal their intentions beforehand, leading markets to adjust accordingly, making the eventual decisions somewhat anticipated.
This particular gathering of the Federal Open Market Committee, however, is surrounded by an unusual degree of uncertainty. Despite market consensus suggesting that the Federal Reserve will cut interest rates, there is significant debate regarding the extent of the reduction. Speculations range from a traditional quarter-percentage-point (25 basis points) cut to a more aggressive half percentage point (50 basis points).
Observers within the financial sector are divided, resulting in the anticipation that this FOMC meeting could be particularly impactful. The decision will be revealed at 2 p.m. ET on Wednesday.
Mark Zandi, Chief Economist at Moody’s Analytics, expressed a preference for a 50 basis points cut but believes a 25 basis points reduction is more likely. He noted, “Rates are high and need to be normalized quickly.” Market pricing in derivatives has shown considerable volatility in relation to the anticipated Fed action.
Until recently, traders anticipated a 25 basis points cut. However, sentiment shifted, indicating a possibility of a 50 basis points cut, with fed funds futures traders pricing in a 63% chance of this larger cut by Wednesday afternoon. This level of conviction is lower compared to previous meetings.
Tom Simons, U.S. Economist at Jefferies, pointed out the Fed’s previous experience with tightening policies did not unfold as expected and suggested a cautious approach to easing. Additionally, former Dallas Fed President Robert Kaplan mentioned a potential division among FOMC members, with some advocating for a proactive approach and others preferring caution to manage risks effectively.
Beyond the debate over the rate cut size, the FOMC meeting will also involve several other key discussions and decisions:
### The Rate Wait
Since July 2023, the central bank has maintained the benchmark fed funds rate within a range of 5.25%-5.5%, the highest in 23 years. This decision has persisted despite decreases in the Fed’s preferred inflation measure and rising unemployment rates. Chair Jerome Powell and other policymakers have signaled that a rate cut is imminent, primarily influenced by the recent slowdown in the labor market.
Seema Shah, Chief Global Strategist at Principal Asset Management, highlighted the Fed’s dilemma of balancing inflationary pressures against potential recession risks.
### The ‘Dot Plot’
The “dot plot,” which outlines officials’ future rate expectations, will likely indicate accelerated rate cuts compared to previous projections. In June, FOMC members predicted only one rate cut by year-end, but the market now anticipates up to five cuts, totaling 1.25 percentage points, by the end of the year.
Moody’s Analytics forecasts a series of quarter-point cuts in the remaining meetings of the year.
### Economic Projections
The FOMC’s Summary of Economic Projections (SEP) will likely reflect adjustments, particularly regarding unemployment forecasts, which are expected to increase from the June forecast of 4.0%. Core inflation forecasts may also be revised downward due to recent lower inflation figures.
Goldman Sachs noted the potential shift in focus towards labor market risks in their economic analysis.
### The Statement and the Powell Press Conference
The committee’s post-meeting statement, set to be released at 2 p.m. ET followed by Powell’s press conference at 2:30 p.m., will be closely scrutinized. Goldman Sachs anticipates the statement will emphasize a balanced stance on inflation and employment risks while maintaining a commitment to maximum employment.
Tom Simons from Jefferies suggested that the Fed might avoid specific forward guidance due to the current economic uncertainties.
In conclusion, the meeting is set to be a pivotal moment, with significant implications for future economic policies and market expectations.
