Login
The FOMC has left the target rate for the Federal Funds Rate unchanged at 4.25-4.50%, matching both our own expectations and economist consensus.
While the decision was not unanimous, seeing two Governors dissent for the first time in over 30 years, this was widely expected and should not be interpreted as a dovish steer on the short-run prospects for rates. Some hawkishness from Chair Powell proved rather more informative in that regard, pushing back on market expectations. While traders continue to price between one and two rate cuts through the remainder of the year, this still looks too optimistic in our eyes.
We leave our base case for no cuts in 2025 unchanged following this latest policy announcement.
Turning first to the policy statement for a more detailed examination, this saw minimal changes relative to June. Growth was described as having “moderated”, having previously been characterised as “solid”, while uncertainty surrounding the economic outlook is now merely seen as “elevated”, with the FOMC removing a qualifier suggesting that this had “diminished”. Granted, this could be interpreted as a dovish adjustment at the margin. But as we see it, the key takeaway remains this: “The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated”. In short, neither side of the Fed’s dual mandate warrants cutting rates at present.
Moreover, we think Powell’s press conference performance set a very high bar for cutting in September. That had been the market base case ahead of today’s event. On the labour market, the Fed Chair was happy to dismiss payrolls, instead suggesting that “The main number to look at is the unemployment rate.” This was last recorded at 4.1% in June, having fallen from 4.3% in May. And while there are two labour market reports between now and the September FOMC meeting, barring a major surprise, we doubt this can rise fast enough to put a rate cut on the table in Q3. Indeed, our view remains that Q4 easing odds are overstated too, given the Fed’s view on inflation.
On this point, Powell noted that while inflation readings are “little changed” since the beginning of the year, he also observed that tariffs are “pushing up prices in some categories of goods”.
More significantly, the Chair went on to note that it is “still quite early days” when it comes to assessing tariff-induced inflation, commenting “the process will probably be slower than we expected at the beginning”. The Fed base case sees US consumers bearing the brunt of tariff costs, though spillovers to non-tariffed goods are expected to be limited, resulting in a one-time increase in the price level. Crucially, though, the onus appears to be on data to confirm that this is the case before starting to cut again, absent a sharp labour market unwind. And after considering today’s performance, we suspect that Chair Powell shares our view – that the evidence needed to cut rates will not be available until Q4 at the earliest, if not even later.
Markets appear to have gotten the message in part, trimming back easing bets post-event. Swap implied odds of a September cut now stand at 46%, having begun the day hovering around 67%.
Even so, this still looks too dovish to us, as does the 1.5 rate cuts priced through to year-end. Given our view of Powell’s comments and our expectations for the economy, we think traders have further to go in reducing easing bets over the coming weeks, posing upside risks to the dollar. Indeed, the DXY index rallied sharply as the Chair spoke and is up close to 1% for the session. Whether that move can extend now depends on the July jobs report, published Friday.
Author:
Nick Rees, Head of Macro Research