FOMC Outcome : Fed signals rate cut in Sept'24

 The FOMC in its latest meeting decided to hold rates at current levels. However, it altered the language in its announcement from a tightening to a neutral bias which all but lays out the red carpet for a first rate cut in September.

 

Inflation had previously been characterized as “elevated” but is now being characterized as “somewhat elevated.” The recent data was described as having made “some further progress”, which is an improvement over the previous language of “modest further progress” used in the last statement. In the assessment of the economy, the Fed characterized GDP growth as “solid”, but the FOMC acknowledged that job gains have “moderated” and noted that unemployment rate has “moved up”.

 

 

Key Highlights:

 

1. Recent economic data has pointed towards inflation data pointing falling back towards the central bank’s 2% target, while the unemployment rate has crept up above 4%
2. Powell said that central bankers would be ‘data dependent’ but not ‘data point dependent’ in determining when to cut the rates
3. Answering the influence of politics in the Sept rate cut, Mr. Powell stated that any rate cut in September would be unrelated to the presidential election and emphasized that the Fed remains apolitical. {Please note we have been saying since last couple of quarters that Rate cut is a certainty near the election driven more by political compulsion and continue to believe so}
4. Powell has however warned against assuming that a rate cut is certain which is in line with Fed’s way of walking left and talking right.

 

Outlook:

 

1. Even though the Fed gave no firm commitment about a September rate cut, markets have reacted positively to the Fed. Stocks rose and yields fell.

 

2. We believe that it’s very likely that the Fed will in fact cut rates in September – and again in December. Keep in mind that the Fed has used Jackson Hole as an opportunity to unveil significant changes to monetary policy, so that might be when we get a stronger signal that rate cuts will begin in September.

 

3. The Indian market has also reacted positively to the announcement with Nifty 50 up by 0.25% (as we write). However we believe the RBI though forced to follow US if the rate cut cycle begins but will have alternative tools at its disposal to maintain the interest rate at their desired level and may not let the yield falls significantly in the near term.