Fed Chair Powell may continue patience until August job data

·         Almost all FOMC participants are in wait & watch mode to be more confident about disinflation sustainability/pace

·         Fine prints of Powell’s July FOMC presser/Q&A  and other Fed comments show Fed may not cut in Sep’24 unless August job data becomes terrible again (like July) ahead of the election

·         Fed may not change its stance suddenly based upon a single month of terrible job reports in July

·         Fed will judge at least 6M rolling average of employment and core inflation data before launching the much-awaited rate cuts cycle over the next two years

On Wednesday (31st July), the U.S. Fed held all primary policy rates for the 8th consecutive meeting (since June 24) as unanimously expected; i.e. the target range for the Federal Fund's Rate (FFR-interbank rate) at +5.38% (median of 5.25%-5.50%); primary credit rate (repo rate) at +5.50%; IOER (reverse repo rate) at +5.40%; overnight repurchase agreement rate (RP) at +5.50% and RRP (Overnight Reverse Repurchase Agreement Rate) at +5.30%, keeping U.S. borrowing costs to the highest level since January 2001 (23-years).

But on Wednesday, the Fed went for a less dovish hold as Powell/Fed was non-committal about any rate cut in/from Sep’24 despite huge pressure from the financial journalists present in the presser and general market implied probability of almost 93% of a rate cut in Sep’24 (before the Fed). Although Powell/Fed acknowledged progress on the front of inflation confidence, Powell continues to maintain that it's not enough and Fed needs to get more confidence about the disinflation process thus Fed needs more economic data relating to inflation and employment for the next few months or at least Q3CY24 (?) before arriving at a decision. But at the same time, Powell also didn’t rule out the probability of a rate cut in Sep’24 and also said the Fed is very close to rate cuts, while at the same time also trashed away any idea about a -50 bps rate cut in any remaining single meeting of Sep/Nov/Dec’24.

Fed is still in a wait-and-watch mode, gained incrementally higher confidence in Q2 after dull Q1, but is not confident enough to launch the post-COVID rate cuts cycle right now (July meeting) as Fed needs more confidence that the present disinflation process will lead to 2% inflation target on a sustainable basis within a reasonable period (mid-term); i.e. Fed is looking for more pace in the present disinflation pace of around -0.2% Q/Q.

In the July meeting, FOMC policymakers noted that there has been some further progress toward the 2% inflation goal although it remains somewhat elevated. Also, recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low as per historical standards. The Fed judges that the risks to achieving its dual mandate of maximum employment and +2% inflation price stability goals continue to move into better balance.

Still, the Fed does not expect it will be appropriate to reduce rates until it has gained greater confidence that inflation is moving sustainably toward 2%. During the regular press conference, Chair Powell said a September cut could be on the table if inflation moves down in line with expectations and that he could imagine scenarios in which the Fed could cut rates several times this year or not at all; the Fed will be able to clarify more in its next dot-plots projection (SEP) in September’24.

Full text of Fed and Chair Powell’s comments in the Q&A: 31st July”24

On Sep’24 rate cut probabilities: Fed may go for rate cuts in Sep’24 if overall core inflation deceleration trend and other data boosted Fed confidence levels

“So on September, let me say this, we have made no decisions about future meetings and that includes the September meeting. The broad sense of the Committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate. In that, we will be data-dependent but not data point-dependent, so it will not be a question of responding specifically to one or two data releases. The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence in inflation and maintaining a solid labor market. If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”

On why the Fed is not going for a rate cut in the July meeting: The Fed is getting closer to rate cuts, but not there yet

“So you asked, why not today? And I would just say, again, that the broad sense of the Committee is that we're getting closer to the point at which it will be appropriate to reduce our policy rate, but that we're not quite at that point yet.”

Fed will consider incoming economic data (inflation, labor market, economic activities/GDP) and the outlook thereof before going for any rate cuts in September or not:

“So I guess I would think about it this way, I'll give an example of cases in which it would be appropriate to cut and maybe that it wouldn't be appropriate to cut. So, if we were to see, for example, inflation moving down quickly, or more or less in line with expectations, growth remains let's say reasonably strong and the labor market remains consistent with its current condition, then I would think that a rate cut could be on the table at the September meeting.

If inflation were to prove sticky and we were to see higher readings from inflation, disappointing readings, we would weigh that along with the other things. I think it's going to be not just any one thing, it's going to be the inflation data, it's going to be the employment data, it's going to be the balance of risks as we see it, it's going to be the totality of all of that, that would help us make this decision.”

Fed will consider overall core inflation (PCE/CPI) data rather than some specific components for the decision of any rate cuts:

“I think it's just a question of seeing more good data. We have seen, the last couple of readings have certainly added to our confidence and we've seen progress across all three categories of core PCE inflation that's goods, it's non-housing services and housing services. So it's just, we had a quarter of poor inflation data at the beginning of the year, then we saw some more good inflation data, we had seven months at the end of last year. We just want to see more and gain confidence, and as I said, we did gain confidence and more good data would cause us to gain more confidence.”

Fed may or may not change Sep’24 dot-plots (SEP) depending upon the overall economic data and outlook thereof:

“So I would just say, really the path ahead is going to depend on the way the economy evolves. And I can't give you any better forward guidance on it than that. We didn't, of course, do a SEP at this meeting. We will do another one at the September meeting. I would just say I can imagine a scenario in which there would be everywhere from zero cuts to several cuts, depending on the way the economy evolves and I wouldn't want to lay out a baseline path for you there today. I've said what I can say about September and today though.”

Fed will eventually consider the labor market and core inflation in line with its dual mandate of maximum employment and price stability; GDP growth is not officially under Fed mandate. The pre-COVID trend shows Fed goes for rate cuts when core PCE inflation hovers around 1.75-1.50% and core CPI inflation is 3.50-3.25% (as core CPI inflation usually +0.50% higher than core PCE); the Fed also thinks that 4.1% headline unemployment rate is historically lower:

“So this is the very reason that we're thinking about, that we've said in our statement that we're going back to looking at both mandates and that we think the risks are coming back into balance. We think what the data broadly shows in the labor market is an ongoing, gradual normalization of labor market conditions. And that's what we want to see.

We've seen that throughout a couple of years, and a move really from overheated conditions to more normal conditions. We are watching the labor market conditions quite closely and that's what we're seeing. If we start to see something that looks to be more than that, then we're well-positioned to respond. That's part of what we're thinking.

We have, growth isn't one of our three. We have two mandates, as you know, the labor market, maximum employment is one, and stable prices are another. So, we weigh those two things equally under the law. When we were far away from our inflation mandate, we had to focus on that. Now we're back to a closer to even focus, so we'll be looking at labor market conditions and asking whether we're getting what we're seeing and as I said, we're prepared to respond if we see that it's not what we wanted to see, which a gradual normalization of conditions was.

If we see more than that, and it wouldn't be any one statistic, although of course the unemployment rate is generally thought to be a single, a good single statistic, we'd be looking at wages, we'd be looking at participation, we'd be looking at all the things; surveys, quits, hires, all of those things, to determine the overall status of the labor market.

But we're looking at it now. I would say again, I think you're back to conditions that are close to 2019 conditions, and that was not an inflationary economy. Broadly similar labor markets then, I think inflation was actually, core inflation running below 2 percent.

So we don't think, I don't now think of the labor market in its current state as a likely source of significant inflationary pressures. So, I would not like to see material further cooling in the labor market, and that's part of what's behind our thinking. The other part, of course, is that we have made real progress on inflation. And we've got growing confidence there that we are not quite there yet, but we're more confident that we're on a sustainable path down to 2 percent. So those two things are working together and we're factoring those both into our policy.

So I wouldn't say I wouldn't want to see any other cooling, it would be more of a material difference. If we, we'd be looking at this and if we see something that looks like a more significant downturn, that would be something that we would, we would have the intention of responding to. So in terms of, I don't think of it that way. I think of it as we're actually in a good place here, we're balancing these two risks of going too soon and undermining progress on inflation, waiting too long or not going fast enough, and you put at risk the recovery.

And so we have to balance those two things, that's the nature of having two mandates and I think this is how we balance them. It's a rough balance, but it does feel like, again, the labor market feels like it's in a place where it's just a process of ongoing normalization, 4.1 percent unemployment is still historically low and we'll just have to see what the data show us.”

Fed will consider overall labor market conditions including JOLTS job openings/quits etc, and also ECI data apart from NFP/BLS employment report/headline unemployment. Overall data shows that the labor market is gradually cooling/normalizing in line with the Fed’s expectations; if the labor market suddenly deteriorates more, raising a hard landing possibility, then the Fed may act promptly:

“So I think all of the data points continue to point to kind of the direction we would want to see, so that was taken as there was a decline in job openings, that was good, today's ECI reading was a little softer than expected, so that's a good reading, it shows that wage increases are still at a strong level but that that level continues to come down to more sustainable levels over time. That's exactly the pattern that we want to be seeing. So I think the data we've been seeing in the labor market are broadly consistent with that normalization process. Again, we're closely monitoring to see whether it starts to show signs that it's more than that.”

Fed is planning multiple or a series of rate cuts to bring down the rate to normal/neutral levels:

“Yeah, I can't say that, honestly. We've seen significant movement in the labor market and we're very mindful of this question of, is it just normalization or is it more? We think it's just normalization, but we want to be in a position to support the labor market. At the same time, we're seeing progress on inflation. So we got to this, we raised rates a year ago at the July meeting, and if you look at the situation in the economy a year ago, unemployment, sorry, inflation was over 4 percent, it was a completely different economy. Now we've made a lot of progress and the labor market, I think unemployment was in the threes, mid-threes, so it's a different economy and I think it's time, it's coming to be time to adjust that so that we support this continued process.

The thing we're trying to do is you know that we have, we've had this significant decline in inflation and unemployment has remained low, and this is an unusual and historically, historically unusual and such a welcome outcome for the people we serve. What we're thinking about all the time is, how do we keep this going? And this is part of that. We think we don't need to be a hundred percent focused on inflation because of the progress we've made; the 12-month headline at 2 and 1/2, core at 2.6, it's way down from where it was.

The job is not done on inflation, but we can afford to begin to dial back the restriction in our policy rate. And I think it's just part of a process. In terms of what that looks like, I mean I think most rates, you would think in a base case, that policy rates would move down from here, but I don't want to try to give specific forward guidance about when that might be, the pace at which it might happen, because I think that's going to depend on the economy, and that's highly uncertain.”

Fed is more satisfied about the disinflation process in Q2CY24 as unlike last year, it’s now being dragged down by service inflation in addition to goods; overall broader disinflation:

“Actually what we're seeing now is a little better than what we saw last year. Last year, as we pointed out late in the year, a whole lot of the progress we saw last year was from goods prices, which were going down at an unsustainable rate, disinflation at an unsustainable rate. This is a broader disinflation, this has goods prices coming down but we're also now seeing progress in the other two big categories; non-housing services and housing services.

So the things we've only, you've got one-quarter of that, we had seven months of low inflation, you got one-quarter of this. I would say the quality of this is higher and it's good, but so far it's only a quarter. So I think we need to see more to know that we're, to have more confidence that we're on a good path down to 2 percent. But as I mentioned, our confidence is growing because we've been getting good data. And things like the ECI Report, and frankly the softening in the labor market conditions, give you more confidence that the economy's not overheating, it doesn't look like an overheating economy, and it looks like an economy that's normalizing.”

Fed is sticking to 12-M seasonally adjusted inflation and other economic data including employment data for its SEP:

“So the thing about, what it is is seasonality and it could just be, it's very, very hard to do appropriate seasonal adjustments. If that's what it is, then that implies that other months were underreporting, too low inflation. if you smoothed it out, it's a zero-sum game. And that's why we look at 12 months; we look at 12 months because that takes all that out, all those effects out, 12 months now is 2 and 1/2 percent headline, 2.6 percent core.

This is so much better than where we were even a year ago. It's a lot better. The job is not done, I want to stress that, and we're committed to getting inflation sustainably under 2 percent, but what we need to take note of that progress, and we need to weigh the risks to the labor market and the risks to our inflation target now more equally than we did a year ago.”

Despite higher borrowing costs and higher inflation, the Fed will ensure price stability along with maximum employment:

“I think that we've been given an assignment by Congress, this is how we serve the American people by achieving maximum employment and price stability, right?

And so in our quasi-constitutional document, the Statement on Longer-Run Goals and Monetary Policy Strategy, we look at the two goals and if one of them is farther away than the other, the two variables; inflation and employment, if one is farther away from its goal than the other, you concentrate on the one that's farther away.

And you take kind of the time to reach the goal. So, for the last couple of years, the best service we could do to the American people was to focus on inflation. But as inflation has come down, and I think the upside risks to inflation have decreased as the labor market has cooled off, and now and labor market has softened, probably the inflation-- inflation's probably a little farther from its target than is the employment, but I think the downside risks to the employment mandate are real now.

So we have to weigh all that and if you think of where that takes us we have a restrictive policy rate, it's restrictive, it's been the rate we've had in place for a full year, and the time is coming, as other central banks around the world are facing the same question, the time is coming at which it will begin to be appropriate to dial back that level of restriction so that we may address both mandates.”

Fed will consider cumulative economic data till September rather than the July jobs report to be released on 2nd August (Friday), just two days after the Fed meeting; the Fed will not react in between and patiently wait till mid-September to get at least August core inflation, job and economic activities report before going for any real policy action. Fed is not certain by waiting ‘too long’ till September, it would be behind the recession curve as ‘certainty’ is not a word in the Fed’s dictionary:

“Certainty is not a word that we have in our business. So, we get a lot of data between now and September, and it isn't going to be one data read or even two, it's going to be the totality of the data, all of the data, and not just-- and then how is that affecting the outlook and how is it affecting the balance of risks? That's going to be the assessment that we do. Of course, we'll all look carefully at the employment report, but so much other data coming in and so much happening between now and the September meeting, and we'll make a judgment.”

Fed is looking into overall job data in totality including private & public jobs and wage growth trajectory:

“Well, we'll look at everything. We've seen some tendency to have a narrowing base of job creation in some months going back, but then we've had some months where job creation was broader. And also the headline number of jobs has come down, so you look at the whole thing and I think you do look at private demand extra carefully, to your point about government. So, we'll just be looking at all those things.”

Overall, the Fed is inching closer to the start of the much-awaited rate cut cycle; but not yet at the point where; the Fed wants to see more good/favorable data for rate cuts:

“Yeah, so look, the objective is to balance the two risks, right? It's the risk of going too soon, and the risk of going too late. We've been, we had seven months of good inflation data at the end of last year, we said we wanted to see more, we said, we pointed out that too much of this was coming from goods, and sure enough, the first quarter wasn't great, inflation did. And now we've got another quarter, a good quarter, and we're balancing the risk of going too soon against the risk of going too late. That's what we're doing.

There's no guarantee in this, it's a very difficult judgment call, but this is how we're making it. So, but in terms of today, your question about today, we did have a-- we had a nice conversation about this issue today. The overall sense of the Committee, as I mentioned, is that we're getting closer to the point at which it will be appropriate to begin to dial back restriction, but we're not quite at that point yet. We want to see more good data. The decision was unanimous, all 19 participants supported it, but there was a real discussion back and forth of what the case would be for moving at this meeting. A strong majority supported moving, not moving at this meeting. That was the strong sense of the Committee, but it's a conversation that we had today, certainly”.

Transmission of any policy change impact takes around 6-12 months in full, although it may be less because the financial market now acts on anticipation, thanks to proper communication/forward guidance by the Fed:

“Yes, it does. And I think the lags have kind of shown up here in the last six months, by the way. You do now see the restriction, whereas, I mean even a few months ago people were questioning how restrictive the policy was. Look at the labor market now, you can see and look at inflation, sorry, rate-sensitive, and interest-sensitive spending. You do see now that policy is restrictive. I wouldn't say it's extremely restrictive but it's certainly effectively restrictive. Yes, the lag should be on the weigh-down, it should take some time to get into the full economy, affect financial conditions and that affects economic activity, hiring, and that kind of thing, and ultimately inflation. It's not instantaneous. Although it's faster than it used to be because markets move now in anticipation of our moves.”

The Fed is trying to ensure a timely change in policy stance to bring inflation down to target on a sustainable basis without causing a hard landing; The Fed will make policy moves not too late or not too soon; presently Fed is fine with the current status of the economy and its restrictive policy stance:

“We have to worry about that. I mean, just to make it clear, it's a very difficult challenging judgment, and we didn't want to go too soon, and we don't want to go too late. But that's, this is how we made that judgment, I feel good about where we are. We're certainly very well-positioned to respond to weakness with the policy rate at 5.3 percent. We certainly have a lot of room to respond if we were to see weakness.

That's not what we're seeing though, what we're seeing, look at the first half growth numbers, look at PDFP at 2.6 percent for the first half, it's not signaling a weak economy. It's also not signaling an overheating economy. Labor market, admittedly, the unemployment rate had moved up seven-tenths, and we're seeing normalization there, but wage increases are still at a high level, unemployment is still at a low level, layoffs are very low, initial claims have moved up, but they're pretty stable and they're historically not high at all. So, the total scope of the data suggests a normalizing labor market and again, we are carefully watching to see that that continues to be the case.”

Fed is aware of the Sahm Rule of recession (identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months), but treats it as a pure statistical warning, not an economic indicator in true sense. Fed considers total labor market data like headline unemployment rate, job creation, wage growths, and labor participation, etc. Although the Labor market is now gradually cooling/normalizing from prior hot/very tight conditions, as per historical standards, it’s still robust/strong enough so that the Fed can continue its present restrictive policy to bring down inflation further for the confidence to launch the next rate cut cycle. But the Fed is ready to take appropriate action if it sees the sudden deterioration of the Labor market amid the availability of enough policy space to respond:

“We, so I would just say, the question is one of are we worried about a sharper downturn in the labor market? So, the answer is, that we're watching carefully for that. We're aware of that rule, which is a, I would call it a statistical thing that has happened throughout history. A statistical regularity is what I'd call it. It's not like an economic rule where it's telling you something must happen. So, again, what do we see? What are our eyes telling us? We look at all the things we're seeing, and what it looks like is a normalizing labor market.

Again, job creation is at a pretty decent level, and wages moving up at a strong level, but coming down gradually, job vacancies have come down, but they're still high by historical standards. So, again, I've been through some of the data already, but what we think we're seeing is a normalizing labor market and we're watching carefully to see if it turns out to be more, it starts to show signs that it's more than that, then we're well-positioned to respond.”

Fed’s maximum employment mandate is dynamic in line with the broad underlying economic structure; thus pre-COVID and post-COVID maximum employment narratives may be different considering various structural issues:

“I think, history doesn't repeat itself. It rhymes. That statement is very true about the economy, you never assume it's going to be just the same. An example would be, is there a trend increase in the level of vacancies? There are many, many examples, so it's never the same. Also, let's remember that this pandemic era has been one in which so many apparent rules have been flaunted, like the inverted yield curve for starters. So, many, many received, pieces of received wisdom just haven't worked, and it's because the situation is unusual or unique in that so much of this inflation came from the shutdown of the economy and the resulting supply problems in the face of, admittedly, very strong demand. So, the whole situation is not the same as many of the other prior inflation or downturns that we've seen, or business cycles that we've seen. So, we're having to learn, we're having to be very careful about the judgments that we make, I would say. So, we don't assume that these regularities will repeat themselves automatically”.

Fed believes overall anecdotal data is mixed rather than soft as may be portrayed by the latest Beige data:

So I do take that seriously, and the Beige Book is great. What’s even greater is hearing the Reserve Bank presidents come in and talk about their conversations with, businesses and business leaders and workers and people in the nonprofit sector in their Districts. But I’ll tell you, it’s a pretty—the picture is, is not one of a slowing or, you know, a really bad economy. It’s one of there are spots of weakness, and there are regions where growth is stronger than other regions, but, overall, it’s—again, look at the aggregate data. The aggregate data—particularly PDFP, private domestic final purchases—is 2.6 percent, and that’s a good indicator of private—of private demand.

So we listen to all of that, and it does, does—I think it’s important to listen to anecdotal data and not just look at the aggregate data. Especially, you know, it’s very hard—GDP data can be volatile quarter to quarter. So it’s just hard to measure economic activity. There are a lot of—it’s just difficult to do. So I look at both, but I wouldn’t say that the—that the anecdotal data is uniformly downbeat; It’s more mixed.

Fed believes that it will remain apolitical (neutral), even if it goes for a Sep’24 rate cut, just ahead of the Nov’24 US Presidential Election because the Fed is acting based on economic calendar/data, not political calendar/data. Trump reportedly said that cutting rates so close to the election is something the central bank knows “they shouldn’t be doing.” Powell said:

“I do, and I think it’s (on whether Fed is apolitical)—first of all, we haven’t made any decisions. I would say it this way: haven’t made any decision about any future meeting. I don’t know what the data will reveal or how that will affect the appropriate path of our policy. I don’t know. I do know how we will make that assessment. That’s what I do know.

So if you take a step back, the current situation, again, is inflation has come down much closer to our goal, and that’s happened while unemployment has remained low. We’re, we’re very tightly focused on using our tools to try to foster that state of affairs continuing. That’s at each of our meetings and all of our decisions, our focus is strictly on that and really on nothing else—doing our part, whatever that part may be. You know, we’re using our best thinking.

We’re doing our best to understand the economy. We follow academics. We follow the many commentators who bless us with their commentary [laughter], but we don’t change anything in our approach to address other factors, like the political calendar. Congress has, we believe, ordered us to conduct our business in a nonpolitical way at all times, not just some of the time. I’ll say this, too: We never use our tools to support or oppose a political party, a politician, or any political outcome. The bottom line is if we do our very best to do our part and stick to our part, that will benefit all Americans.

If we get it right, the economy will be stronger. We’ll have price stability. People will find jobs. Wages will rise in real terms. Everyone will benefit. So that’s what we believe, and that’s how we will always act. This is my fourth presidential election at the Fed. I can tell you this is how we think about it. This is what we do. So anything that we do before, during, or after the election will be based on the data, the outlook, and the balance of risks and not on anything else.”

At present, the Fed is not considering the outcome of the Nov’24 election and fiscal/social policies thereof; policies of Trump and Harris admin may be different:

“No. We do not do that. We do not do that. We don’t—we don’t know who’s going to win. We don’t know what they’re going to do. We don’t act as though we know, and we just can’t do that, you know? We basically—we have our forecast. We’re not—we can run simulations of different potential policies, but we would never try to make policy decisions based on the outcome of an election that hasn’t happened yet. We would just—that would just be a line we would never cross. You know, we’re a nonpolitical agency. We don’t want to be involved in any—in politics in any way, so we wouldn’t do that.”

Fed always encourages meaningful discussions in the FOMC meetings among various policymakers; there are always different vires but overall decision-making is largely unanimous:

“So there’s—there are always meaningful differences. There are. And, you know, we talk a lot before, during, and after the meeting. We do have a very robust discussion of these things. You’re right that, in most cases, people, if they feel heard and they feel that they’ve—that their position has been given serious consideration, for most people, most of the time, that’s going to be enough. There are dissents. That’s fine. You know, no one has a veto. No single person has a veto, so it just is a question of, who will vote for and against?”

We’ve had—we’ve had, you know, dissents. We haven’t had so many during the pandemic era, and it just may be that, we felt more united because we felt under a lot of pressure to get things right, but before the pandemic, we had plenty of dissents. And dissents happen. It’s part of the process. There’s nothing wrong with dissents, and if it happens, it happens.”

“Well, so, you know, the way the meeting is set up, the first day there’s a discussion of financial stability because it’s every other meeting we have that, and then we have an opportunity to comment on that. Then we have an economic go-round. And then, this morning, we have the monetary policy go-round. And I think in people’s economic or their monetary policy go-round, people express their views about this, and, you know, there’s a range of views. People—as you will know from the speeches that they give—people have different ways of thinking about the economy. And so, in the minutes, we’ll lay this out in a much—in a much better way than I can do off the cuff, but there’s a range of perspectives.

And, you know—but I do think that we are, we’re a consensus-driven organization. People come together. This was a unanimous—a unanimous decision. And, in the end, everyone, everyone supported the outcome—not just the voters, but everyone. So I would also say, some people examined the possibility, you know, the case for moving at this meeting, but, overwhelmingly, the sense of the Committee was not at this meeting but as soon as the next meeting, depending on how the data come in.”

As of now, the Fed is not considering any rate cut to the of -50 bps in any single meeting:

“You know, I don’t want to say—I don’t want to be specific about what we’re going to do, but that’s, that’s not something we’re thinking about right now--- Of course, we haven’t made any decisions at all as of today (for any rate cut IN September)”.

But if data supports the Fed’s confidence, then a rate cut may be on the table in the Sep’24 or subsequent meetings:

“Well, assuming that the totality of the data supports such an outcome. No question. That’s, that is the case, as I mentioned. We think that the time is, is— it’s approaching, and if we do get the data that we—that we hope we get, then a reduction in our policy rate could be on the table at the September meeting.”

Despite criticism by various quarters including former NY Fed President Dudley, accusing the Fed of waiting too long for rate cuts has already ignited recession, Fed is trying its best to move (cut rates) at an appropriate time (not too late or too soon) for ensuring inflation fall below +2.0% targets on a sustainable basis without causing an all-out recession; i.e. Fed is trying for soft landing:

“So this is the judgment that we have to make, and we’re, we’re well aware of the judgment. We’re—as I’ve said, we have to weigh the risk of going too soon against the risk of going too late. If we go too soon, we can—we had a lot of advice, you know, to go ahead and cut after the seven good months of last year. We didn’t. We said we needed to see more. Then we saw some higher inflation. We’ve seen one-quarter of good inflation, and we’ve seen the labor market move quite a bit. And, as I mentioned, I don’t think it needs to cool off anymore for us to get the inflation results that are related to the labor market—not all inflation is, of course. So I think it’s a difficult judgment to make, and what you see is the Committee judges that that time is drawing near. That time could be in September if the data support that.”

Overall, the Fed thinks the current state of the US economy is Goldilock in nature (not too hot or too cold); strong labor market and falling inflation; it’s not a case of a hard landing; it’s more like a soft landing; in any case, if there is a sudden detrition of the labor market, Fed has enough space to act swiftly:

“So I, I don’t know whether they’ve increased. I think they’re low. I think this is—you don’t see any reason to think that this economy is either overheating or sharply weakening. That’s just not in the data right now. What’s in the data right now is an economy that’s growing at a—at a solid pace, a labor market that has cooled off, but inflation—sorry, unemployment is low.

The data overall show a strong labor market. And so that’s, that’s really what you see. It’s not—it’s neither an overheating economy nor is it a sharply weakening economy. It’s, it’s kind of what you would want to see, but, of course, the job is never done. You know, we’re, we’re watching to see, you know, which way the economy heads. And I think we’re—if we are to respond to weakness, we’re certainly, you know, well equipped to do that. But that’s not what we’re seeing. What we’re seeing is strong economic activity and, you know, a good labor market and inflation coming down.”

Fed is carefully preparing the market for the eventual rate cuts cycle keeping in view overall economic data and its outlook; no forecasters is 100% right; Fed is cognizant of its forward guidance:

“Yeah, I mean, I think the reality is that that forecasters—and this isn’t just the Fed by any means—forecasters have been continually surprised by, for example, the strength of the economy last year. So I think we had to be pretty humble, about giving forward guidance about this, that, and the other thing. We need to be pretty careful about that.

And, you know, when you’re saying you’re going to be data-driven, of course, it’s always what the data—how they affect the outlook and the balance of risks, but it’s—nobody has great vision deep into the future.

In terms of a reaction function, that’s a—that’s a long-time discussion that people had forever. I think people have understood for a long time that we were very focused on bringing down inflation. Nobody was confused about that. The data have, you know— again, we’ve seen significant improvement in inflation just for the last quarter. Markets move around on that—on the data. Not so much—it’s not really what we’re going to do. It’s more just that the data keep coming in, and markets are very, very responsive to that data right now.”

Conclusions:

Fed Chair Powell indicated Fed may further evaluate economic data in August (unemployment and core CPI) and the outlook thereof before deciding on any rate cut moves. If overall data is not satisfactory to provide the much-awaited confidence about the disinflation process, then the Fed may further watch September data (Q3CY24) and outlook thereof for any rate cuts from Dec’24. If the Fed indeed goes for rate cuts based on one/two months of mixed/bad jobs data, then it may look Fed is panicking.

We may see better/improved/upbeat US job data for not only August but also for Sep and October and a moderate inflation report (ahead of Nov’24 US election) to justify Bidenomics. Fed is not in a hurry to start the rate cut cycles of 11 QTR cuts without evaluating data for a few more months in totality. Thus Fed may not only evaluate inflation and employment data for July and August but also for September and October/ November before launching the much-awaited rate cut cycles from Dec’24 QTR end.

Despite the market now suddenly panicking for a hard landing for the ‘terrible’ NFP/BLS job report for July, if we consider the increasing number of multiple job holders, higher number of temporary layoffs, and an unusual addition in labor force due to one-time seasonal factor), the overall nature of US labor market is still strong enough for Fed to continue its wait & watch stance to gain more disinflation pace and required full confidence to launch the series of rate cuts from Dec’24 rather than Sep’24.

But even if the Fed responds to the present market panic and begins cutting rates from Sep’24 instead of Dec’24, it will make no significant difference in reality (Real Street) but may boost the sentiment of Wall Street by ensuring financial stability first. In that scenario, even if the Fed cuts the rate by -25 bps each (no question of -50 bps pace), it will continue the pace of 4 rate cuts each in 2025-26 and one QTR/HLY cut in 2027.

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump 2.0.

Although the market is now almost discounting the start of Fed rate cuts from Sep’24, considering overall pace of disinflation, Fed may continue its wait & watch stance till at least Dec’24 and may continue to indicate on 31st July FOMC/policy meeting that Fed is gaining incrementally higher confidence for overall disinflation process till Q2CY24, but still it’s not enough for launching the rate cut cycle in Sep’24 as Fed may want to be more confident after having actual data for another QTR. If Q3CY24 average US Core inflation (CPI+PCE) indeed goes around +2.9%; i.e. below the +3.0% ‘confidence’ line, then the Fed may officially indicate the start of the 11-QTR rate cut cycle from Dec’24 QTR till Dec’27 (two half yearly rate cuts in 2027).

The Fed will get the Sep’24 core inflation report by mid-late Oct’24 and accordingly may indicate the rate cut from Dec’24, just ahead of the Nov’24 election to keep both Democrats and Republicans happy; the Fed may indicate the start of a rate cut in Oct’24 (just ahead of the Nov’24 election) Fed talks and may start cutting rates from Dec’24 (just after the Nov’24 election), keeping Wall Street near life time high with some healthy corrections.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (39300) has to sustain over 39900 for any further rally to 40100/40500-41050/41450* and 41675*/41950-42100*/42700 in the coming days; otherwise sustaining below 39800/39550, DJ-30 may again fall to 39200 and 39000/38800-38600/38300-38000 in the coming days.

Similarly, NQ-100 Future (18300) has to sustain over 18800-19000 for any further recovery to 19300/19600-19750/19950 and 20150*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18700/18500-18200/18000 it may further fall to 17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5300), now has to sustain over 5450 for any further recovery to 5475/5525-5605/5675 and rally further to 5725/5750*-5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5425/5400-5350/5300 may further fall to 5250/5200-5175/5100* and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2400) has to sustain over 2425-2440 for a further rally to 2455*/2490-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2420-2410, may fall to 2395/2385-2370/2360 and 2350*/2340-2320/2300-2290/2275* and 2235/2210-2160/2110 in the coming days (depending upon Fed stance, Gaza/Ukraine war trajectory and US election outcome).