NEWS AND INSIGHTS | INSIGHTS

CIO Notebook: Powell Pushes Toward a September Cut

August 01, 2024
Shannon Saccocia, CFA, Chief Investment Officer—Private Wealth

With seven months of disinflationary process in 2023 coupled with the last three months, it would appear, in our view, that enough progress has been made to allow the Fed to adopt a more accommodative approach in September.

Coming into yesterday’s Fed meeting, only a few economists and strategists predicted that the Federal Reserve (Fed) would kick off a rate-cutting cycle, so it was no real surprise that the Fed announced that it would maintain the target range of the federal funds rate of 5.25 – 5.50% for the eighth straight meeting. Consensus expectations were focused instead on the likelihood that the Fed would use this month’s meeting to telegraph a potential rate cut in September.

In our view, changes in the Federal Open Market Committee (FOMC) statement were directionally consistent with that expectation. The statement identified that while inflation has eased, it remains “somewhat elevated” versus just “elevated” in the June statement. In addition, the Fed acknowledged that the unemployment rate has “moved up but remains low” while the pace of jobs gains has “moderated.” Most importantly, perhaps, the statement noted that the Fed sees the risk to its dual mandate as moving into “better balance” with the FOMC attentive not only to inflation but to “both sides of its dual mandate.”

In his press conference, Fed Chair Jerome Powell continued to reiterate that the Fed is balancing “the risk of going too soon versus too late.” He stated that “if the labor market were to weaken unexpectedly, or inflation were to fall more quickly than expected, we are prepared to respond.” Powell cited the continued data-dependent approach to monetary policy decisions, cautioning that the Fed is focused on the “totality of the data” rather than specific data points, and that the path ahead is going to depend on how the economy evolves. However, he also stated that he believes that there is an ongoing normalization occurring and that “we’re in a good place here.”

In terms of next steps, we believe it is clear that the next two CPI and non-farm payroll reports, along with the July PCE release, will be critical in delivering the confidence the FOMC needs to begin cutting rates. Powell stated that there could be anywhere from no cuts to several cuts this year. However, in our view, he did appear to tamp down the notion of a 50-basis-point cut in September through both his words and body language during the press conference. We believe the immediacy of his response that such a cut was not being considered at this time likely offsets concerns from investors that the Fed is seeing a more pronounced weakening in the economy than the markets do at this point, particularly given that there was conversation in this month’s meeting around potentially cutting rates now.

We think reaction to the press conference indicates that Powell did indeed deliver the message that a September rate cut is probable, as equities and bonds both rallied and yields fell across the curve. Risks to that outcome certainly remain; namely that inflation data re-accelerates unexpectedly, much as it did in the first quarter of this year. However, with seven months of disinflationary progress in 2023 coupled with the last three months, it would appear, in our view, that enough progress has been made to allow the Fed to adopt a more accommodative approach.

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