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.
