According to the latest news from Reuters, the Fed may remove the description of "high inflation" at next week's policy meeting. Analysts believe that if this is true, it will be the strongest signal yet that the central bank plans to cut interest rates as early as September, and begin its monetary policy cycle of easing, and investors now consider this to be almost certain. Yesterday evening, the US stock market also rebounded sharply as a result.

At the same time, Esther George, former president of the Kansas City Federal Reserve Bank, said that the Fed had begun to see the signals they had been looking for to reduce interest rates. Richard Clarida, former vice chairman of the Fed from 2018 to 2022, went even further, saying that with inflation falling and the labor market cooling, three interest rate cuts this year are indeed possible.

However, earlier, Fed Chairman Jay Powell and his colleagues had said that they needed irrefutable evidence that the once-hovering inflation rate at a 40-year high was returning to the Fed's 2% target before the Federal Open Market Committee lacked confidence in starting to lower interest rates. President Trump, who is expected to be re-elected in November, also said last week that he hoped the Fed would not cut interest rates until after the election.

Fed rumors

This morning, two rumors about the Fed were circulating in the market: one is that the Fed will remove the description of "high inflation" at the next monetary meeting, and the other is that former Fed executives have come out repeatedly to say that interest rate cuts may be imminent.

In September 2021, after three consecutive months of inflation rates exceeding the Fed's 2% target, Fed officials and decision-makers changed their relatively passive attitude towards inflation and began using the term "elevated" to describe it. It was not until May, June, and July of that year, when the Personal Consumption Expenditures (PCE) price index, which the Fed uses to set inflation targets, rose by more than 4%, that the phrase "high inflation" was added. Although the PCE price index has now fallen to 2.6%, and it seems to be continuing to decline, the policy statement of the Federal Open Market Committee (FOMC), which is responsible for setting interest rates, still retains this description.

The Fed's policy meeting next week may finally remove this description. If so, this will be the strongest signal yet that the central bank plans to cut interest rates as early as September and begin its monetary policy cycle of easing, and investors now believe this is almost certain. However, some believe that changing the description of inflation from "high" to a milder wording could also lead the Fed to modify another key sentence in its current policy statement: that "officials have confidence in inflation continuing to move towards the 2% target before they cut rates."

In addition, Richard Clarida, former vice chairman of the US Federal Reserve from 2018 to 2022, said that with inflation falling and the labor market cooling, the Fed may cut interest rates three times this year. Clarida, now a global economic adviser for asset management giant Pacific Investment Management Company (Pimco), said in an interview in Hong Kong that further improvement in US inflation data and a rise in the unemployment rate will both affect the Fed's decision. He said that Pimco predicts two rate cuts and "there is indeed a possibility of a third rate cut."

"Many people are waiting for the Fed to cut interest rates. There are about 5 or 6 trillion dollars in the US money market fund. Once the interest rate is cut, it will be a big deal," said Clarida. His company believes that the first interest rate cut may occur in September.

Former Kansas City Federal Reserve Bank President Esther George also said the Fed had begun to see signs of the interest rate reduction they had been looking for.

The FedWatch tool from CME Group shows that traders expect the Fed to cut interest rates at its September meeting, and the tool forecasts interest rate trends based on federal funds futures trading data.

Is the expectation of an interest rate cut opening up?

As inflation falls, expectations of an interest rate cut are growing stronger. But from the Fed's previous attitude, it is still a matter of "waiting and seeing." Does the signals released in the past 24 hours mean that the opening of expectations of an interest rate cut is quietly underway?

Giving up the July policy meeting would allow officials to collect more high-quality data, which is the threshold set by Powell earlier this month in congressional testimony. If Wall Street's predictions of further monetary tightening come true, this threshold will be met. Between the July and September policy meetings, officials will receive two inflation and employment reports, as well as a series of updates on the health of the consumer and real estate markets.

Having more conclusive evidence is crucial to calming officials who remain skeptical about the situation, especially considering the unexpected inflation surge earlier this year. Diana Swonk, chief economist at KPMG America, said, "They have been fooled before, and credibility is important."

Julia Coronado, a former Fed economist and current director of macro policy outlook, said the Fed's actions are like an "ocean-going liner," which means that the Fed usually avoids sudden policy shifts except in times of crisis. Coronado expects a "clear" change in the July policy statement, which will indicate that rate cuts are imminent.

However, Michael Strain, Director of Economic Policy Studies at the American Enterprise Institute, said that another worrying issue is that the inflation rate is "staying" at around 2.6% or 2.7% of the target level. He did not advocate for the central bank to take action in September.

Jan Hatzius, chief economist at Goldman Sachs, believes that waiting until September to cut interest rates would increase the risks that the Fed is trying to avoid. He said, "If you wait, the economic risk is further deterioration in the labor market. Given how much things have changed - how much inflation has declined, how much the labor market has rebalanced - why not do what you might have to do a little earlier?"

Edited by Jeffrey