Fed holds rates, door open for September cut

What happened?

As had been telegraphed ahead of time and widely expected, the Federal Open Market Committee (FOMC) left its policy rate unchanged at 5.25%–5.50% in their July meeting. With that decision well communicated in advance, the real focus was on what guidance would be given about when rate cuts may come. On that front, the Fed was noncommittal in their official statement and in Chair Powell’s press conference, giving themselves the maximum flexibility for the September meeting.

Implications for the rate path

We continue to expect that the first cut will come in September. The language in the Fed’s statement indicated that the two ends of their mandate—full employment and price stability—are back in balance. That opens up the path for rate cuts, but it seems the FOMC needed just a bit more confidence than what they received in the last two months’ data. As Powell said, the Fed will be “data dependent, but not data point dependent.”

Given that they have clearly been pleased by the latest data, we think it would take an upside inflation surprise between now and the September 18th meeting to prevent them from cutting at that time. Failing signs of continued overheating, they’re likely to move at that meeting.

Overall, this statement was exactly what we and the market anticipated. We’ll have two more employment reports and two more inflation readings before the next meeting, which should be much more informative on the likely action in September than any statement from the Fed at this meeting.