Fed rate cut in July? Inside the US central bank, few takers

Despite market pricing reflecting a rising probability of a July rate cut, bolstered by recent dovish remarks from Fed Governor Waller and Vice Chair Bowman, the majority of Federal Reserve policymakers are maintaining a 'wait and see' stance. Officials like Susan Collins and Michael Barr emphasize the need for more economic data, particularly regarding the impact of tariffs on inflation and employment, before considering adjustments to the 4.25%-4.50% policy rate. While the Fed's internal projections still largely indicate two quarter-point cuts this year, most anticipate these adjustments later in the year, after key inflation and jobs data become available.

Analysis

The Federal Reserve is signaling a predominantly cautious and data-dependent stance, creating a disconnect between a few dovish policymakers and broader market hopes for an imminent rate cut. The majority of officials, including Boston Fed President Susan Collins and Fed Governor Michael Barr, advocate for holding the policy rate in its current 4.25%-4.50% range, citing the need for more data before the July meeting. This patient approach is supported by a solid labor market, with unemployment at 4.2%, and concerns that tariffs could push inflation, which was 2.1% in April, higher. Although the Fed's own projections point towards two quarter-point rate cuts this year, key figures like San Francisco Fed President Mary Daly suggest these actions are more likely in the fall, after crucial inflation and jobs reports for June and July are released. A dovish minority has emerged, with Governor Christopher Waller and Vice Chair Michelle Bowman suggesting a July cut may be necessary to preempt labor market weakness, a notable shift for the previously hawkish Bowman. However, the prevailing sentiment, articulated by Chair Jerome Powell, is to wait for clarity on the economic impact of tariffs, indicating that a decision is unlikely until at least the end of summer.

Key Decisions for Investors

• Investors should temper expectations for a rate cut at the July FOMC meeting, as the majority of Fed officials have clearly signaled a preference to wait for more economic data.
• Monitor upcoming Personal Consumption Expenditures (PCE) inflation and monthly jobs reports closely, as these figures will be the primary determinants of the Fed's timing for initiating rate cuts later this year.
• While the base case remains two rate cuts in 2024, portfolio positioning should account for potential delays if tariff-related price pressures prove more significant than anticipated, prolonging the Fed's hold.
• Pay attention to the divergence in commentary between dovish and patient Fed members, as a growing dovish consensus could rapidly accelerate the timeline for easing and impact fixed-income and equity valuations.