Global markets are all hoping for a rate cut, why is the Federal Reserve still dragging its feet?

Despite continuous improvement in inflation data and more signs of cooling in the labor market, the Federal Reserve remains cautious about cutting interest rates. The CME Group's FedWatch tool shows that a rate cut in July is still a low-probability event.

Federal Reserve Chairman Powell has emphasized the need to see inflation consistently fall to the target level of 2%. While recent data is encouraging, the Fed still wants to gather more information to ensure the stability of the downward trend in inflation.

Moreover, past experiences have made the Fed more cautious. After inflation steadily progressed towards the 2% target for several months, it suddenly rebounded in the first quarter of this year, catching the Fed off guard and disrupting its original rate-cutting plans. This experience has made officials more vigilant about declaring victory too early.

A recent media article quoted Diane Swonk, the chief economist at Mckinsey & Company, as saying:

They have been misled by illusions before, (the central bank's) credibility is important.

More importantly, there are still disagreements within the Fed on the necessity and extent of rate cuts. The dot plot released in June shows that some officials believe only one rate cut may be needed this year, while others think two cuts may be necessary.

In summary, the Fed is weighing the pros and cons of waiting. On one hand, waiting allows for more data collection to enhance decision-making reliability, but on the other hand, excessive delay could lead to an economic downturn, especially as the labor market has cooled significantly.

Powell has also stated:

It is not necessary to wait for inflation to fall to the Fed's 2% target before cutting rates, "that would be waiting too long," because the effects of monetary policy have a lag, "if rates are kept too high for too long, it will overly suppress economic development," "the job market doesn't need to be tighter than before the COVID-19 pandemic."

Therefore, some analysts believe that if the Fed remains on hold in July, a rate cut in September will be a "done deal." The market currently widely expects the Fed to start cutting rates in September, which will be the last rate-cutting window before the November presidential election and a crucial moment for balancing inflation control and economic growth.

It is worth noting that between the rate decisions in July and September, the Fed will also receive two inflation and employment reports, as well as economic data on consumer health and the real estate market. By then, the Fed's stance may gradually become clearerIn response, former Federal Reserve economist and current head of MacroPolicy Perspectives, Julia Coronado, expects that the July policy statement will clearly hint at a rate cut.