Today’s decision by the Fed to keep US interests on hold hasn’t come as much of a surprise but whether we’ll see them cut in September still remains on the table.
Commenting on today’s decision, Lindsay James, investment strategist at Quilter Investors, said:
“The Federal Reserve has opted to hold rates at 5.25-5.50% once more in a move that had already been reflected by markets. However, we await further detail in the press conference as the Fed may still signal that its first cut could be on the cards for September.
“Investors had assumed a cut at this stage was highly unlikely despite signs of weakness in the labour market, with GDP growth coming in ahead of expectations in Q2 at an annualised rate of 2.8%, double the 1.4% seen in the first quarter. Most importantly, however, though inflation is slowing, it remains above the target level – at least on an annual basis. Core PCE inflation for June was reported at 2.6% year over year, with no improvement from May.
“While Q2 appears to have been stronger than expected for the US economy, there are increasing signs that it will slow as we move through the year. The labour market has moved into balance, with supply closely matching demand, and corporate surveys are pointing to a weakening picture in both manufacturing and services. Earnings season is now well underway, and companies from McDonalds to Visa have signalled that consumers are under pressure as big ticket items including mortgage costs and car loans eat into spending habits.
“A September cut will be data dependent, particularly with another two inflation readings between now and then, but as it stands it seems it would take a fairly drastic reading for the Fed not to move ahead at its next meeting.
“A soft-landing still looks to be the most likely outcome for now, but Fed officials must be cognisant of the evidentially rising risks in the US economy which come at a time of both political upheaval and the threat of a regional all-out war in the Middle East. As such, the Fed may open the door to rate cuts in September, which is largely already reflected by markets.”
Also commenting on yesterday’s FOMC decision, Salman Ahmed, Global Head of Macro & Strategic Asset Allocation at Fidelity International said:
“Chair Powell set September up for the start of the cutting cycle as both labour market and inflation progress helped the Fed to build the cutting signal. The combination of statement and the press conference turned out to be a strong hit without the trappings of forward guidance. Uncertainty around Fed policy moves this year have reduced significantly, but the 2025 outlook will hinge on election outcomes and developments around trade and fiscal policy.”
James McCann, Deputy Chief Economist, abrdn said; “The Fed was never going to move interest rates today, with the central bank having been clear that it needs more evidence that inflation is slowing before it cuts. However, this bar looks to be fast approaching following a run of cooler price gains in recent months, with this meeting’s press release highlighting “progress” towards the FOMC’s inflation target. Moreover, signs of slowing growth and a softer labour market add to the case for the central bank to start to dial back restrictiveness, and the Fed is clearly starting to put more weight on these downside risks. Against this backdrop, a September cut looks to be increasingly locked in, barring any major upsets.
“This will kick start a series of rate cuts, but the pace of these through 2025 will likely depend on who sits in the White House. Indeed, the wildly different trade, fiscal and immigration policy platforms presented by Democrats and Republicans, and the implications of these for inflation, adds significant uncertainty around the rate outlook.”
