Fed expected to hold rates steady, open door to September cut
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[July 31, 2024] By
Howard Schneider
WASHINGTON (Reuters) - The Federal Reserve is expected to leave interest
rates unchanged at the end of a two-day policy meeting on Wednesday, but
also indicate that a reduction in borrowing costs could come as soon as
September.
Contracts tied to the U.S. central bank's policy rate show investors are
convinced a rate cut will happen at the Sept. 17-18 meeting, with the
only disagreement over whether the Fed will begin easing policy with a
quarter-percentage-point reduction, as most expect, or a more aggressive
half-percentage-point cut, according to CME Group's FedWatch tool.
The Fed has kept its policy rate in the 5.25%-5.50% range for the past
year.
A 50-basis-point rate cut would likely require evidence that the economy
is slowing faster than expected and putting at risk the still-low, 4.1%
unemployment rate.
Throughout the Fed's more than two-year battle to tame inflation, which
included the fastest rate hikes since the 1980s, the economy has grown
faster and performed better than expected - and the most recent data
suggests that is continuing.
The economy grew at an above-trend 2.8% annual rate in the second
quarter. Job openings and hiring data released on Tuesday showed
continued resilience in the job market, with the number of open
positions remaining above 8 million.
The layoffs rate also dropped. The rate at which workers are quitting
jobs and the ratio of unemployed people to open positions, now at 1.2,
are both roughly where they were before the COVID-19 pandemic, a fact
that has led Fed officials to regard the supply of and demand for
workers in the economy as roughly balanced.
"The labor market has cooled over the last several months but isn't
weak," said Nancy Vanden Houten, lead U.S. economist for Oxford
Economics. "That's a scenario the Federal Reserve wants to guard
against, and we expect the Fed to begin cutting rates in September."
The central bank's new policy statement will be released at 2 p.m. EDT
(1800 GMT), and Fed Chair Jerome Powell will hold a press conference
half an hour later.
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The exterior of the Marriner S. Eccles Federal Reserve Board
Building is seen in Washington, D.C., U.S., June 14, 2022.
REUTERS/Sarah Silbiger/File Photo
'NORMALIZATION OF ACTIVITY'
Analysts say they expect Powell to emphasize that the Fed will
remain "data-dependent" when it comes to its ultimate decision, with
a larger-than-usual gap of time between now and the next meeting and
more data to go along with it.
That begins with the release on Friday of the Labor Department's
employment report for July. Economists polled by Reuters on average
expect firms added a still-solid 175,000 jobs this month, with the
unemployment rate unchanged.
Recent data has shown inflation continuing to slow, with the
headline personal consumption expenditures price index increasing at
a 2.5% annual rate in June and at around 1.5% for the last three
months.
The Fed targets 2% annual inflation based on the PCE price index.
"The Fed does not believe it needs to hurry" and cut rates now, said
Tim Duy, chief U.S. economist at SGH Macro Advisors. After a strong
initial report on second-quarter economic growth, "the data remain
consistent with a normalization of activity rather than a sharper
slowdown. Rate cuts at this point are still preemptive with the goal
of stabilizing activity at the current near-trend pace."
(Reporting by Howard Schneider; Editing by Paul Simao)
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