Source: Jin10 Data

Due to a favorable shift in US inflation and a continued weak labor market, the Federal Reserve is expected to create conditions for lowering borrowing costs this week.

The two-day meeting of the Federal Open Market Committee (FOMC) will end early Thursday this week, when the committee will once again stabilize the benchmark interest rate at a 23-year high of 5.25-5.5%. Although the rate decision itself looks ordinary, this meeting will be an important platform for further policy shifts that are likely to be determined in September at the earliest.

Brian Sack, former head of market operations at the New York Fed, said, "The Federal Reserve is getting closer to cutting interest rates, and this week's communication should reflect that."

Fed officials are better able to accept the idea of interest rate cuts because there is more concrete evidence that inflation has finally been brought under control after repeated efforts.

In recent months, US consumer price growth has significantly slowed, alleviating concerns that earlier this year caused a shock.

Meanwhile, the US labor market has entered a new phase. Recruitment has slowed from its peak, resulting in slower wage growth. Layoffs have increased, pushing the three-month average unemployment rate up 0.43 percentage points from the lowest point in the past 12 months, just shy of the 0.5% Sam rule trigger point that marks the start of an economic downturn.

Officials hope to maintain a healthy labor market and recognize that maintaining policy rates that are too high for too long will jeopardize that goal.

The Fed may acknowledge these developments directly in a revised policy statement and at a press conference by Chairman Powell on Thursday.

As early as June, the FOMC pointed out in a document that it had only made moderate further progress in achieving its target of a 2% inflation rate, and was "highly concerned about inflation risk."

In addition, the committee has long stated that it will not consider lowering rates until it is "more confident that inflation is sustainably moving towards its target."

Economists expect the Fed to acknowledge that it has made further progress and that its preferred inflation gauge is currently hovering at 2.6%, well below its 2022 peak.

They also believe that the statement will emphasize that rising inflation is not the only risk the Fed faces in a weak labor market. As Powell stressed, failure to act quickly to provide relief to US businesses and borrowers could also cause unnecessary unemployment.

Finally, the FOMC may confirm its growing confidence in controlling inflation and prepare to cut rates.

Powell and other officials have not yet commented specifically on the timing of the first rate cut, but have said they will make decisions gradually based on data from each meeting.

Between the July and September meetings, the Fed will receive two sets of inflation and employment reports and other updated information. Forecasts suggest the incoming information will confirm the need for rate cuts.

Some economists believe that given the slowdown in the economy, delaying the rate cut until September would be a serious mistake.

Bill Dudley, former president of the New York Fed, said last week, "While it may be too late to stem the recession by cutting rates, the current drag adds unnecessary risks."

But waiting has several advantages in the Fed's view.

First, the Fed has gone wrong in the past, and officials hope to be absolutely sure they have control of the inflation situation before taking any major policy steps.

There is still disagreement within the Fed about the appropriate path of rate cuts. As early as June, policymakers were almost equally divided between those who expected only one and those who expected two rate cuts this year.

Ellen Meade said, "Powell may feel that he cannot truly reach consensus before September," she was a senior advisor to the Federal Reserve Board before 2021 and now works at Duke University.

She added, "There is a risk of not acting fast enough, but there is also a risk of acting too fast and having to reverse course later. Given the inflation rebound earlier this year, they may be more concerned about the second risk."

Peter Hooper, vice chairman of research at Deutsche Bank, also believes that it would be wise for the Federal Reserve to wait until September to launch another easing cycle.

He said that if the weakness of the labor market exceeds expectations in terms of speed and magnitude, the Federal Reserve may return to a "neutral" policy environment quite quickly, that is, no longer suppressing demand.

Hooper, who has worked at the Federal Reserve for nearly 30 years, believes that there is still room for further interest rate cuts in November and December, before remaining unchanged until September 2025. At that time, his team expects the Federal Reserve to conduct quarterly interest rate cuts and gradually bring policy interest rates back to between 3.5% and 4%.

Editor / jayden