One of the reasons why the Federal Reserve was hoping for more data was the rebound in inflation at the beginning of the year, but the waiting risk is increasing.

Since the Federal Reserve announced the end of its historic interest rate hike cycle against inflation, people have been wondering when and how fast it will provide relief to American borrowers.

Federal Reserve Chairman Powell and his colleagues have said that they need irrefutable evidence to prove that the inflation rate, which has been hovering at a 40-year high, is falling back to the Fed's target of 2%. Before that, the Federal Open Market Committee (FOMC) will lack the confidence to start cutting interest rates.

Why is the Fed hesitating to declare victory?

A series of favorable inflation data, coupled with signs that the labor market is not as hot as before, suggests that this high standard has been more or less met.

However, senior Fed officials are still hesitating and dare not rashly declare victory. Instead, they believe that there will be many benefits to waiting for a while and then lowering the current 5.25%-5.5% range of policy interest rates.

Abandoning the rate cut in July will allow the Fed to collect more data. Powell reiterated this point at a congressional hearing earlier this month, namely if Wall Street's forecasts for a further strengthening of the anti-inflation trend come true, it will trigger a threshold for interest rate cuts.

Between the policy meetings in July and September, officials will receive two sets of inflation and employment reports, as well as a series of other latest information on the cornerstone of the world's largest economy, such as the health of consumers and housing markets.

Given the unexpected rebound in inflation earlier this year, it is essential to have more conclusive evidence about the anti-inflation issue to quell some officials' doubts about the economic outlook.

"They've been burned before and credibility is important," said Diane Swonk, chief economist at Grant Thornton in Chicago.

After steadily moving toward the target of 2% for several months, the first-quarter data showed that price pressures once again appeared unpleasantly, which cast doubt on the Fed's ability to control inflation and caused its plan to cut interest rates at the beginning of the summer to fall through.

This is the latest in a series of economic surprises that the United States has encountered after the outbreak of the COVID-19 pandemic, which has misled Fed officials and forced them to reconsider their policy settings.

Despite the fact that price pressures have rapidly decreased in the second quarter, it is generally believed that the situation in the first three months is an abnormality, and officials remain cautious about sending out signals of policy turnaround too soon. In addition, there is still some disagreement among officials about how much the interest rate needs to be lowered once this process is launched. The forecast released in June showed that the number of interest rate cuts this year is between one and two times.

The Fed may pave the way for interest rate cuts in September.

If the rate cut door in July is closed, then the rate cut door in September seems to be wide open.

Traders in the federal funds rate futures market have fully priced in rate cuts in September. This meeting will be the last meeting before the November presidential election, after which officials will hold two more meetings before the end of the year. Market participants expect them to cut interest rates by at least 25 basis points twice this year.

In the past month, Powell and his colleagues have consistently believed that they are becoming more and more optimistic about the downward trend of inflation. The two most influential people in the FOMC, New York Fed President Williams and Fed Governor Waller, gave their support to this view a week before the scheduled quiet period, stating that the Fed is getting "closer and closer" to the time to cut interest rates.

As Julia Coronado, former Fed economist and current president of MacroPolicy Perspectives, said, the Fed is like an "ocean liner," which means that except for crises, the Fed generally avoids sudden policy shifts.

Coronado expects that there will be "clear" changes in the policy statement in July, indicating that a rate cut is imminent.

The significant changes that are happening in the labor market further confirm this view. The employment situation in the United States was once seen as an accelerator of inflation, but now it has slowed down.

Although recruitment is still strong, Americans have fewer opportunities to find new jobs, and the number of people applying for unemployment benefits is increasing. Wage growth is also slowing down.

In a recent public appearance, Powell said: "From now on, I think the upward risk of unemployment is greater than we have seen for a long time." But he also warned that the prospect of "unbalanced" inflation data will make recent rate cuts "more uncertain."

Michael Strain, director of economic policy studies at the American Enterprise Institute, pointed out that a worrying issue is that the inflation rate will remain above the 2.6% or 2.7% target level, so he opposes the Fed taking action in September.

More importantly, the Fed does not want the labor market to deteriorate further. The Fed also insists that bringing the inflation rate back to its target value does not necessarily have to result in too much unemployment.

Coronado said: "Because the labor market is highly flexible, they originally thought they had enough time to determine the trend of inflation. But that expectation is disappearing."

Goldman Sachs Chief Economist Jan Hatzius even believes that waiting until September to cut interest rates further will increase the risk of the Fed trying to avoid the outcome. He said:

"If you wait, there may be a further deterioration in the labor market. Considering that the situation has changed so much, why don't you do what you might have to do ahead of time?"

Editor/Feynman