Will Powell Hint At September Rate Cut? What Major US Investment Banks Expect From Fed Meeting

The upcoming Federal Open Market Committee (FOMC) meeting on July 30-31 will mark the eighth consecutive session where the federal funds rate is held steady at 5.25%-5.5%.

As inflation eased in the second quarter and unemployment saw a slight uptick, the key question for July’s meeting is whether policymakers, particularly Fed Chair Jerome Powell, will feel confident enough to prepare investors for a potential rate cut in September.

What Markets Expect

Market-implied probabilities from interest rate futures suggest a 95.9% chance of holding rates steady in July, indicating near-certainty that no rate change is expected.

However, the outlook shifts significantly starting in September. Market participants are fully pricing in a rate cut, with a 90% probability of a 25-basis-point reduction and a 10% chance of a larger 50-basis-point cut, according to the CME Group FedWatch Tool.

The federal funds rate is anticipated to be lowered again in both the November and December meetings, potentially ending the year between 4.5% and 4.75%. Additionally, expectations are for two more cuts in the first half of 2025.

Also Read: Magnificent 7 Face Pivotal Market Moment As 4 Mega Tech Giants Report Earnings This Week

What Analysts Expect

There is a broad consensus among Wall Street analysts that the FOMC will begin easing in September.

However, Bank of America stands out, anticipating the first cut only in December.

“The Fed is optimistic that cuts are likely in the near-term, but we do not think it is willing to signal September is a done deal. It could happen, but it will depend on the data,” Michael Gapen, an economist at Bank of America, wrote in a recent report.

Gapen explained that the Fed doesn’t need to push heavily for a September cut as markets are already pricing in a full cut in September and almost three cuts for the year.

The more pressing question, according to Bank of America, is whether they might delay it. If they do, it is expected to be a mild pushback, as Powell has emphasized that decisions are data-dependent and will be made on a meeting-by-meeting basis.

“We think he would likely say that the Fed’s outlook for the economy does not warrant more than 1-2 cuts this year, but unanticipated weakness in labor markets could prompt greater easing. We see US GDP growth of 2.8% in 2Q as evidence that downside risk to growth is low,” Gapen stated.

JPMorgan Chase & Co. suggests that while there is a case for a rate cut at this meeting, Fed officials are not fully convinced yet. They expect no changes to the descriptions of inflation and employment in the statement, but might see “modest” progress removed. Powell is expected to refrain from providing calendar guidance but will highlight the Fed’s increased confidence in the inflation outlook.

Morgan Stanley believes significant progress on inflation allows the Fed to move closer to rate cuts. They anticipate the statement will acknowledge this progress and note rising risks to the labor market. They predict the first cut in September, with a total of 75 basis points of cuts this year.

“Encouraging inflation news and a further rise in the unemployment rate have pushed Fed officials closer to cutting,” Goldman Sachs economist David Mericle wrote in a note.

“We suspect that an acceptable July CPI report would likely be enough to clinch a September cut,” he added. Goldman Sachs expects tweaks in the language around unemployment and inflation, indicating a more balanced dual mandate.

Citi expects the Fed to send a clear signal for a 25 basis point rate cut in September. They foresee forward guidance being revised to reflect increased confidence in achieving the 2% inflation target. However, Powell is unlikely to provide guidance on the pace of future rate cuts beyond stating that more cuts will follow and that policy rates will remain data-dependent.

Read Next:

• Investors Rush Into Junk Corporate Bonds As Fed Rate Cut Speculation Goes Wild: High-Yield Credit ETF Sees Record Monthly Inflows

Image created using artificial intelligence via Midjourney.