Federal Reserve officials are expected to move closer this week to cutting interest rates from the current levels, which are the highest in about 20 years, but at the same time will not make any specific decisions about lowering the cost of borrowing and will only signal a possible easing of monetary policy in September.
The mentioned opinions regarding the upcoming statements and hints from the financial regulator of the United States are held by experts interviewed by the media. Economists who spoke with reporters claim that according to the meeting results on the policy, the Federal Open Market Committee of the US central bank will decide to maintain its benchmark rate in the range of 5.25% to 5.5%, the peak reached last year.
Statements about the intentions of the financial regulator of the United States will be made during a press conference by Fed Chairman Jerome Powell, which will be held on Wednesday, July 31, in Washington.
Economists interviewed by the media suggest that policymakers are more likely to recognize the fact that inflation in the US is approaching the central bank’s target of 2%. If a corresponding statement is made, it will mean that the Fed actually evaluates the current configuration of economic reality as an environment in which there are circumstances and conditions favorable for deciding on cutting interest rates.
There is currently an increase in the unemployment rate in the United States. In June, the corresponding figure reached 4.1%. According to experts interviewed by the media, officials of the central bank of the United States may perceive the mentioned tendency in the employment area as a circumstance indicating the expediency of deciding to ease monetary policy in the short term. At the beginning of 2023, the unemployment rate in the US was 3.4%.
It is worth noting that the Fed adheres to an extremely cautious position in the context of the approach to cutting interest rates. Officials of the central bank of the United States say that before deciding on easing the current monetary policy strategy, it is necessary to obtain as much data as possible on the state of affairs in the country’s economic system, indicating that the inflationary process is on a trajectory of steady movement towards the target mark. At the same time, in some other regions of the world, financial regulators have already started lowering the cost of borrowing. The relevant decisions were made by the Swiss National Bank and the European Central Bank. At the same time, in this context, it is worth noting that in the era of globalization, which consists of bringing national economies closer together and deepening the interaction of appropriate systems, including in the manufacturing sector and the area of finance, the monetary policy of some financial regulators to a certain extent extends to the strategies of similar institutions in other parts of the world. This means that the decisions of officials of one central bank can become factors that correct the measures taken by their colleagues from other parts of the world. Such an impact effect depends on the scale of the national economy in which the central bank operates. In a relevant sense, the Fed is one of the most influential financial institutions in a global context. This thesis is related to the fact that currently, the economic system of the United States is the largest in the world. The country’s gross domestic product is about $28.8 trillion.
Subadra Rajappa, head of US rates strategy at Societe Generale, suggests that the Fed will not make statements on the immediate start of monetary policy easing following the July meeting. In her opinion, the central bank of the United States will take concrete action on cutting interest rates in September.
New York Fed President John Williams this year announced the desire to move away from restrictive measures. Similar formulations may be made public by the central bank of the United States on Wednesday. It is worth noting that such statements are abstract to a certain extent. In this case, there is a desire to ease monetary policy, but at the same time, there are no specific promises and a detailed action plan to move towards lowering the cost of borrowing.
Economists interviewed by the media are convinced that, following the results of the July meeting, the central bank of the United States will not decide on changing interest rates. In their opinion, in their comments, officials will focus on stating of improving the prospects for further dynamic of the inflation in the US in the short term.
Economists interviewed by the media also claim that officials of the central bank of the United States, as part of statements on the results of the July meeting, will not talk about modest progress in combating the rising cost of goods and services. The corresponding wording reflecting the effectiveness of the Fed’s current monetary policy in counteracting inflation was actively used in June. In July, according to economists interviewed by the media, officials of the central bank of the United States may announce further progress in countering the rise in the cost of goods and services. Such a characterization of the effectiveness of efforts does not specify achievements in the fight against inflation, but at the same time indicates progress in the framework of the relevant process.
Also, economists who spoke with journalists admit the possibility that the Federal Open Market Committee will declare additional confidence that the dynamic of growth in the cost of goods and services in the United States is approaching the target mark of 2%. If the appropriate wording is used, it will be a kind of signal about the imminent lowering of the cost of borrowing.
The markets are currently dominated by confidence that the United States financial regulator will begin cutting interest rates in September. In this nowadays space, increased attention is focused on the question of how clearly and unambiguously the US central bank will signal the beginning of monetary policy easing in the autumn following the results of the July meeting. There will likely be no statements that would contain wording directly indicating further actions by the Fed since this does not correspond to the traditional practice of communicative interaction between the financial regulator of the United States and the public. The most realistic assumption in this case is that there will be some kind of hints about the prospects for monetary policy easing in the short term.
Jerome Powell admits the possibility of cutting interest rates if the data on the condition of the United States economic system are such as the Fed expects.
Investors estimate the probability that the US financial regulator will begin to ease monetary policy in July at less than 5%. It is worth noting that there are also supporters of lowering the cost of borrowing already this month. These actions of the central bank of the United States are supported by former Fed Vice Chair Alan Blinder, Goldman Sachs Chief Economist Jan Hatzius, and former New York Fed President William Dudley.
Many economists will be watching closely to see if Chicago Fed President Austan Goolsbee, a leading dove, will be the first in more than two years to cast a dissenting vote against the official decision. He will vote this week as an alternate following the retirement of Cleveland Fed President Loretta Mester in June.
With a high degree of probability, journalists will try to find out Jerome Powell, and the prospect that at the September meeting, the financial regulator will decide to begin easing monetary policy. They will also be interested in the possible scope and pace of appropriate measures before the end of the current year and in 2025. It is possible that in response to such potential questions, Jerome Powell will say that the Fed’s monetary policy strategy will depend on data on the condition of the United States economic system. Such a formulation is standard for the practice of communication interaction between the US central bank and the public.
Journalists are also likely to ask Jerome Powell about the extent of his concern about the cooling in the labor market and what an unexpected weakening might mean that would require a response.
Investors expect the Fed to lower borrowing costs by just over a quarter of a percentage point in September. They also predict that the central bank of the United States will make two more similar decisions in November and December.
Derek Tang, an economist with LH Meyer/Monetary Policy Analytics, says Jerome Powell could be asked about what would meet the bar for the unexpected weakening that makes them reassess whether quarterly 25 basis point cuts are enough.
Journalists can also ask the Fed chairman about his opinion on the current political situation in the United States. Most likely, as part of the answer to this question, he will repeat his standard formulation that politics is not a factor impacting the decisions of the US financial regulator related to monetary policy.
