The Wall Street Journal’s Fed watcher Nick Timeraos released his latest interest rate forecasts, and he didn’t include any sort of leak about a potential rate cut. Instead, Timeraos confirmed that the Fed will be preparing to cut rates in September without making a prior commitment. That’s a consensus view given that September is fully priced in, including a slim chance of a 50 basis point rate cut.
The Fed’s new willingness to cut interest rates reflects three factors: better news on inflation, signs that labor markets are slowing, and a changing calculus about the conflicting risks of allowing inflation to remain too high and cause unnecessary economic weakness.
- Fed officials are unlikely to change interest rates at their July meeting, but they may signal a possible cut in September.
- “Officials are becoming more wary of waiting too long and wasting the opportunity for a soft landing.”
- Rising inflation, slowing labor market change Fed’s risk calculus
- Core inflation eased to 2.6% in June from 4.3% a year earlier
- Unemployment rate rises to 4.1% in June from 3.7% at the end of last year
- New York Fed’s Williams: ‘There’s a decision ahead of us at some point’ on rate cut
- Fed’s Waller: Labor Market at ‘Sweet Spot’ and Should Be Maintained
- Chicago Fed President Goolsbee Hints at Rate Cut Argument: ‘We’ve Tightened Policy Too Much Since We’ve Been Holding This Rate’
- San Francisco Fed President Daly Warns: ‘We’re Not at Price Stability Yet’
I don’t expect any strong hints of action in the statement, but even gradual signals will be seen as proof, given that the Fed knows what the market is pricing in. Conversely, the Fed may look to back away from 100% pricing for September to give itself some options, especially in light of Friday’s strong GDP report.