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Back in their March meeting, the Federal Open Market Committee’s members were almost evenly split between two and three rate cuts, slightly tilting toward three. In their June meeting, they remained close to evenly split between one and two cuts, this time tilting marginally toward one. Revising up end-2024 core inflation forecast by 20bps to 2.8%, they signalled slower-than-anticipated progress toward the 2% inflation target. However, May inflation data (CPI was flat, month-over-month), released the same day as FOMC meeting, should give some comfort to the inflation picture. Chair Powell, in his press conference, saw the latest data positively, although stressed that more progress was needed to be seen.
We think by the time the September policy meeting takes place, there will be plenty of data available for FOMC members to see that inflation worries have abated largely. From manufacturers’ input price to insurance costs, rentals to medical services, as well pump price of gasoline, there is room for stable or receding inflation outcome in the coming months, in our view. A September cut could be readily followed by one in December, in this scenario.
We concede that the two rate cut scenario is not materially more likely than the one-cut scenario. In fact, at the tail end of the probability distribution looms a no-cut scenario, taking into account the possibility that soaring asset prices could spill over into consumer prices. A still-strong labour market contributes to that scenario.
When the rate cut comes, it won’t be one reflecting great worries about jobs or financial stability, rather one aimed at keeping real interest rates stable. It could therefore signal a shallow rate cut cycle through 2025, something the markets would have reckon with eventually. But for now, the key issue is the timing of the first cut in this cycle. We stay with September.
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