July FOMC, a Turning Point for US Monetary Policy?..."Signal Rate Cut in September"

Base Interest Rate Likely to Remain Steady at 5.25~5.5% Annually
September Cut Signal Expected Amid Inflation Slowdown and Employment Cooling

The upcoming July Federal Open Market Committee (FOMC) meeting of the U.S. Federal Reserve (Fed) this week is expected to mark a major turning point in U.S. monetary policy, which has been tightening for over two years. While the Fed is likely to keep the benchmark interest rate unchanged, recent cooling in the labor market and easing inflation have led to speculation that Fed Chair Jerome Powell will signal a rate cut in September at this meeting.

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According to Wall Street on the 28th (local time), the Fed is highly likely to hold the benchmark interest rate steady at 5.25?5.5% for the eighth consecutive time at the July FOMC regular meeting scheduled for the 30th?31st. The key question is whether the Fed will send a signal of a monetary policy shift in September at this week's meeting.

Bloomberg News stated, "The Fed is likely to lower borrowing costs within a few months," adding, "As the strong but slowing labor market faces increasing risks of becoming precarious, Chair Powell may send a signal for a rate cut this week." The Wall Street Journal (WSJ), a U.S. economic daily, also forecasted, "This meeting will be the most significant for the time being," and "Due to inflation and labor market conditions, Fed officials may signal that a rate cut is likely at the September meeting."

Chair Powell has emphasized the risk of rising inflation but has expressed concerns several times this month about the risk of labor market slowdown. While the focus has so far been on price stability, it is understood that the policy emphasis will gradually shift toward achieving the goal of full employment. U.S. Treasury Secretary Janet Yellen recently described the U.S. labor market in an interview with Bloomberg News as "strong and resilient without overheating," and assessed that "the risks of inflation and employment are balanced."

The market has already priced in a rate cut in September as a given. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on this day fully reflects a 100% probability that the Fed will cut rates at the September FOMC.

It is evaluated that conditions are now in place for the Fed to cut rates immediately. The U.S. June Personal Consumption Expenditures (PCE) price index rose 2.5% year-over-year, down from 2.6% the previous month. The core PCE price index, which excludes volatile food and energy prices, rose 2.6% year-over-year, matching the previous month's increase. Along with easing inflation, the labor market, which has been fueling prices, is also showing signs of cooling. The unemployment rate in June was 4.1%, the highest in two years and six months.

Chair Powell, who was previously criticized for underestimating inflation in 2022 and responding late to price pressures, now faces the burden of potentially causing a recession by responding too late to the labor market slowdown.

However, as the U.S. economy still appears robust, there is considerable caution within the Fed that it has the leeway to monitor inflation and employment data for a couple of months. The preliminary estimate of U.S. real Gross Domestic Product (GDP) growth for the second quarter was 2.8% annualized quarter-over-quarter, double the previous quarter's 1.4%. John Williams, President of the Federal Reserve Bank of New York, recently said in an interview, "At some point, we will have to decide how to lower rates by easing restrictive policies," adding, "Fed officials will learn a lot between July and September." The U.S. Department of Labor's July employment report, to be released on August 1, is also expected to provide grounds for the Fed to cut rates in September.

Anna Wong, an economist at Bloomberg Economics, analyzed, "Most Fed officials will agree at the July meeting that the risks of a slowdown in full employment and rising inflation are nearly balanced," and "There is expected to be broad consensus soon that a rate cut will be appropriate."

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