July FOMC, a Turning Point for US Monetary Policy?..."0.5%P Cut Expected in September" (Comprehensive)

Base Interest Rate Likely to Remain Steady at 5.25~5.5% Annually
September Cut Signal Expected Amid Inflation Slowdown and Employment Cooling
0.5%P Cut in September Also Anticipated Depending on July-September Indicators

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. With the labor market cooling and inflation easing recently, there is speculation that Fed Chair Jerome Powell will signal a rate cut in September at this meeting. Some also cautiously suggest that if U.S. economic indicators worsen, the Fed could cut rates by 0.5 percentage points in September.

[Image source=Yonhap News]

According to Wall Street on the 28th (local time), the Fed is highly likely to keep the benchmark interest rate steady at 5.25?5.5% for the eighth consecutive time at the July FOMC regular meeting held on the 30th?31st. The key question is whether the Fed will send a signal of a 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, Chair Powell may signal a rate cut this week." The Wall Street Journal (WSJ) also forecasted, "This meeting will be the most significant for the time being," and "Fed officials may signal that a rate cut is likely at the September meeting due to inflation and labor market conditions."

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 had been solely on price stability until now, 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 conditions are considered ready 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, excluding volatile food and energy, 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 showing signs of cooling. The unemployment rate in June reached 4.1%, the highest in two years and six months.

Powell has faced criticism for misjudging inflation as temporary in 2022 and responding late to price pressures, so this time he carries the burden of possibly causing a recession by responding too late to labor market slowdown.

However, as the U.S. economy still appears robust, there is considerable caution from the Fed that it has nearly two months to monitor inflation and employment data trends. The preliminary estimate of U.S. real 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 July employment report from the U.S. Department of Labor, 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 that a rate cut will be appropriate soon."

Some speculate that the Fed may hold rates steady in July and then cut rates by 0.5 percentage points in September. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market currently prices a 4.7% chance of a rate cut of 0.25 percentage points or more in July and a 100% chance of a rate cut in September. Among these, the probability of a rate cut of 0.5 percentage points or more in September stands at 11.3%.

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, predicted, "If signs of labor weakness increase between July and September, it means the economy has worsened, and the Fed will cut rates more." George Goncalves, U.S. chief macro strategist at Mitsubishi UFJ Financial Group, analyzed, "As more signs of economic weakening appear by September, the Fed may take preemptive action," adding, "The longer the Fed waits, the more it may have to do later."

This content was produced with the assistance of AI translation services.