FOMC

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The Fed faces risk from multiple directions and is experiencing a high level of uncertainty. Our baseline scenario sees the hawks mostly unchanged and the doves to consolidate towards two cuts for 2025.

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If there’s one takeaway from this meeting, it’s that the Committee wants to position themselves much more cautiously on the inflation outlook, but the Fed is just a couple of bad labor market prints from having to put more cuts back on the table.

Now that rate normalization is about to move into the next, slower phase, it is important that they do not predetermine the scale of normalization.

We will be hoping for two things at the September meeting this week: a 50 bps cut and minimal upwards revisions to the unemployment rate projections in the Summary of Economic Projections (SEP).

By delaying rate cuts in search of certainty, the Fed risks being behind the ball. The FOMC should actively keep the option of a 50 basis point cut on the table between now and the September meeting.

While Fedspeak has certainly shifted during the past few weeks, few members are itching to cut rates at the July meeting.

With the labor market still strong and April inflation representing an improvement over Q1 but still not good enough, the committee is in “looking for confidence” mode.