MNI FED WATCH: On Track For A First Rate Cut In September

MNI (WASHINGTON) - The Federal Reserve is expected to leave its benchmark overnight interest rate at a 23-year high Wednesday, while signaling some willingness to begin easing policy soon if inflation cools further.  

A quarter point cut is fully priced in for the September FOMC meeting and one and a half more by the end of the year, according to futures markets. The federal funds rate target has been in a 5.25%-5.5% range since July 2023. 

But Fed officials will want to see more favorable inflation data before making a "tactical recalibration" of their benchmark interest rate, and would prefer to leave the timing of next moves open-ended, former Atlanta Fed President Dennis Lockhart told MNI. Two more CPI and job reports are due before the September 17-18 meeting. 

Fed Chair Jerome Powell has the trickly job of hinting at coming easing this week without ratifying market pricing for a cut at every meeting, former St. Louis Fed President James Bullard told MNI. "He'll want to send a signal that the committee is on track but wants some optionality." 

STRONG DATA

The U.S. economy grew solidly in the first half of the year, outperforming developed market peers that have already begun cutting rates. Consumer spending in particular has held up better than expected. 

Inflation is showing signs of moving back toward the Fed's 2% target on a sustained basis, and the labor market has softened recently without any significant risk of falling off a cliff, former senior Fed staffer Bill English told MNI. Twelve-month core PCE inflation slowed to 2.6% in June and the unemployment rate inched up to 4.1%. 

Some are concerned the labor market could now be more susceptible to a sudden weakening. Former Fed Board economist Julia Coronado tells MNI there is a good case to begin cuts right away rather than wait until September, and new research suggests the current strong pace of hiring may belie a broader softening in economic conditions, former Fed Board research director David Wilcox told MNI. 

US ELECTIONS

Former Fed officials see added uncertainty beyond September, especially if Donald Trump wins the presidential election and makes good on his promise to levy a 10% tariff on all imports. 

Hikes could be back on the table to head off what are certain to be inflationary policies, former Boston Fed President Eric Rosengren told MNI. 

"They certainly wouldn't cut rates," former IMF chief economist Maurice Obstfeld told MNI.