Resolution shifts to rate cut in September! The Federal Reserve remains on hold, with a new focus on employment risks in addition to inflation

Key Points:

The Federal Reserve continues to keep interest rates unchanged, in line with market expectations.

The decision statement changed to describe inflation as "somewhat" high, further progress in reducing inflation, employment growth "slowing down", and the unemployment rate remaining low but "rising somewhat".

The decision statement no longer says "still highly concerned about inflation risks", but instead focuses on the risks faced by the dual mandate of employment and inflation.

The decision statement continues to emphasize that it is not appropriate to lower interest rates until there is more confidence in reducing inflation, and the risks of employment and inflation remain more balanced.

"New Federal Reserve News Agency": The Federal Reserve has paved the way for a rate cut in September, treating employment and inflation targets more equally for the first time in two years. This significant shift implies that inflation may no longer be an obstacle to rate cuts.

Some analysts believe that the dovishness of the decision is slightly lower than expected, and it does not express more confidence in reducing inflation.

As expected by the market, the Federal Reserve continues to maintain high interest rates unchanged, but at the same time, it has signaled a possible rate cut in September: the Fed further confirmed progress in reducing inflation, and in addition to inflation, the Fed has begun to emphasize avoiding risks in employment.

On Wednesday, July 31st, Eastern Time, after the Federal Open Market Committee (FOMC) meeting, the Federal Reserve announced that the target range for the federal funds rate remains at 5.25% to 5.50%. Since July 2022, the FOMC voting members of the Fed have unanimously supported the rate decision for the 18th consecutive meeting.

Thus, in this tightening cycle that began in March 2022, the Federal Reserve has not raised rates for eight consecutive meetings. Since the rate hike in July last year, the Fed has kept the policy rate unchanged at a high level for over twenty years.

The Federal Reserve's decision to stay put this time is in line with market expectations. As of the close of trading on Tuesday, the Chicago Mercantile Exchange (CME) tools show that the probability of the Fed maintaining interest rates unchanged this week is about 97%. Journalist Nick Timiraos, known as the "New Federal Reserve News Agency," wrote last weekend that the futures market expects the Fed to prepare for a rate cut in September this week, and the statement will imply a higher likelihood of a rate cut in September.

After the decision was announced on Wednesday, Timiraos went even further to suggest that a rate cut in September is imminent, with an article titled "The Federal Reserve Clears the Way for a Rate Cut in September." The article points out that although rates remain unchanged, Fed officials have made a significant shift this time, emphasizing a more equal focus on the dual goals of employment and inflation, indicating they are closer to a rate cut.

George Goncalves, head of macro strategy at Mitsubishi UFJ Financial Group, commented that the Fed's decision statement shows that the Fed has changed enough elements and carefully considered how to express a shift towards easing.

Win Thin, global head of market strategy at BBH, pointed out that many had hoped the Fed's decision would reflect some degree of easing, such as saying "we have more confidence in reducing inflation," but this time the Fed did not hint at a rate cut in September. The Fed will cut rates, but they are keeping their cards close to their chest, with a slightly lower dovishness than expected

Inflation remains somewhat high, making some further progress, while the unemployment rate remains low but has risen somewhat

Compared to the previous Federal Reserve monetary policy decision statement in June, this decision made two major changes, the first being the commentary on inflation.

The previous statement mentioned that in recent months, there had been modest further progress in achieving the Fed's inflation target of 2%. However, the current statement states that there has been some further progress in reaching the inflation target. The previous statement said, "Inflation has slowed somewhat over the past year, but remains somewhat high." The current statement reiterated the first half of the sentence, but changed the second half to "but remains somewhat high".

At the same time, in the first paragraph of the statement evaluating the economic situation, the Fed also modified its description of employment. The previous statement stated that job growth remained strong and the unemployment rate stayed low. The current statement, however, mentions that job growth has slowed and the unemployment rate has risen somewhat, but still remains low.

Reiterating the continued balance of risks for employment and inflation, focusing on the risks faced by these dual mandates

The second major change in this statement is in the second paragraph discussing the Fed's two mandates - maximum employment and 2% inflation. Firstly, the Fed continues to emphasize that the FOMC seeks to achieve maximum employment and a 2% inflation rate over the longer run, with the committee judging that the risks of achieving both employment and inflation goals continue to trend towards a better balance. Subsequently, the Fed modified its wording.

The previous decision statement continued to emphasize: "The economic outlook is uncertain, and the FOMC remains highly concerned about inflation risks." This time it was changed to: "The economic outlook is uncertain, and the committee focuses on the risks faced by the dual mandates."

Timiraos commented that since two years ago when the Fed began rapidly raising rates to combat high inflation, this is the first time the Fed has treated employment and inflation goals more equally. This shift is significant because it indicates that inflation may no longer be an obstacle to rate cuts, especially as the labor market continues to cool.

Continuing to reiterate that it is not appropriate to cut rates until there is more confidence in lowering inflation

Regarding interest rate guidance, this statement maintains the guidance from January unchanged, reiterating that the FOMC expects that it is not appropriate to cut rates until there is more confidence in moving towards 2% inflation.

In terms of the quantitative tightening (QT) plan, this statement continues to use the wording from the previous statement, stating that the FOMC will continue to reduce its holdings of U.S. Treasury securities, agency debt, and agency mortgage-backed securities (MBS).

At the previous Federal Reserve monetary policy meeting on April 30th to May 1st, it was announced that starting from June, the monthly reduction cap for the balance sheet of U.S. Treasury securities would be lowered by $35 billion to $250 billion, while the cap for MBS reduction remains unchanged.

The red text below shows the deletions and additions in this decision statement compared to the previous one.