FOMC Meeting – Laying The Groundwork

Notes From the Desk – FOMC Meeting – Laying The Groundwork

 

As expected, the FOMC held both rates and the pace of balance sheet reduction steady but left little doubt that September is a ‘live’ meeting where the first rate cut could be delivered.

 

The Dovish Bits:

 

• The Committee recognized the improvement in inflation and the softening labour market.
• It is notable that the FOMC pointed out that they are now paying close attention to both sides of their dual mandate (inflation and employment).
• When pressed as to what data they needed to see to be comfortable with cutting rates, Chairman Powell noted that it merely needed to align with their forecasts.
• Chairman Powell revealed that cutting rates was discussed today; however, it was a unanimous decision to remain on hold today, suggesting that September is the likely date.

 

The Awkward Stuff:

 

During the press conference, the Chairman was challenged several times about why the FOMC did not cut today.  He finally pointed out that the 12-month inflation rate was still above target (many shorter-term averages are at target).

 

The AGQ Thought:

Unless there is a surprising uptick in inflation, the Federal Reserve will cut rates in September.  We think the first move will be 25bps; however, if the economic data shows weakness, a 50bps cut is a possibility.

 

The Implications:

US bond yields moved approximately 8-10 bps lower (part of this move is tied to geopolitics in the Middle East), while equity indices moved higher on the prospects of easier monetary policy.