Stocks had been in something of a holding pattern in the weeks leading up Wednesday’s meeting of the Federal Open Markets Committee. To Fundstrat Head of Research Tom Lee, it seemed that investors were awaiting clarity about the Fed’s rate-cut intentions. 

This meeting was preceded by several months of data showing declining inflation. The most recent CPI data, released on July 11, showed headline inflation falling for the first time since 2020. Core CPI cooled on both a MoM and YoY basis, coming in below expectations. 

Recent “Fedspeak” also seemed to foreshadow the possibility of a dovish shift. On June 27, even noted hawk Raphael Bostic, head of the Atlanta Fed, wrote of his worries that waiting too long to cut would “risk sapping too much momentum from the economy and labor market and creating unnecessary and harsh disruptions.”

The New York Fed’s John Williams told the Wall Street Journal on July 17 that “I feel like the past three months — and I would include June [CPI], based on what we’ve seen — seems to be getting us closer to a disinflationary trend that we’re looking for. [...] We are seeing a broad-based disinflation.”

These remarks were consistent with what Fed Chair Jerome Powell had been signaling in various public appearances since the last FOMC meeting in early June. For example: 

• At a European Central Bank conference in Portugal on July 2, he told attendees that the last two inflation readings in April and May "do suggest that we are getting back on a disinflationary path.”
• After June CPI data came out a few weeks later, he told the Economic Club of Washington that the latest CPI numbers “do add somewhat to confidence” that inflation is slowing sustainably, particularly given readings from May and April CPI. Those are “three better readings, and if you average them, that’s a pretty good pace,” Powell said.

Chair Powell has also described increasing concern about the other part of the Fed’s dual mandate — “maximum sustainable employment.” In his biannual testimony before the Senate and the House on July 9, he told lawmakers that "inflation has eased notably” before pointing out that “the latest data show that labor market conditions have now cooled considerably from where they were two years ago, and I wouldn’t have said that until the last couple of readings.” Powell asserted that the risk of elevated inflation had come into better balance with the risk that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

On Wednesday afternoon, the FOMC announced that — as widely expected — it would leave rates unchanged at 5.25% - 5.50%.

At the post-meeting press conference, Powell continued to address labor-market concerns, acknowledging that “we’re watching really carefully for” any signs pointing to a “sharper downturn in the labor market.” For those concerned about the opposite — about a burgeoning labor market potentially causing a resurgence in inflation, Powell provided a counter. “I don’t now think of the labor market in its current state as a likely source of significant inflationary pressures,” he said, reiterating that “I would not like to see material further cooling in the labor market.”

“That’s a big deal,” Lee said, “because as you know, a lot of people focus on services, thinking there’s still inflation there.” In fact, Lee saw the overall press conference as “very dovish,” highlighting several particularly dovish statements during the Q&A session in particular.

To Lee, it was a big deal for Powell to use the word “normalized” to describe the economy. “A normalized Fed funds rate is 3% – and we’re currently at 5.5%,” Lee pointed out. “So I think it’s clear if he’s talking about a normalized economy, the neutral rate should be around 3%.”

Powell also said, “The reduction in our policy rate could be on the table as soon as the next meeting in September [...] assuming that the totality of the data supports such an outcome.” In Lee’s view, this was the Fed Chair’s way of “confirming that the Fed is on track for a September cut.” 

This signal was clear enough to have some speculating, however briefly, that the Fed might even cut by 50 bps rather than 25 bps in September. As illustrated below, probabilities for a 50 bps cut, as implied by Fed funds futures trading, jumped on Wednesday afternoon during the press conference. 

In response, Washington Policy Strategist Tom Block said, “I’m skeptical that 50 basis points is going to happen in September.” In Block’s view, Powell typically tends to stress the Committee’s openness to all possibilities based on the data, but during the press conference, “he sort of slipped and admitted that ‘we aren’t even talking about [50bp].’” 

Powell also made it clear during the press conference that politics plays no role in the Fed’s decisions, but as Block pointed out, “Fed officials don’t live in a vacuum.” With the elections coming up and Committee members mindful of the need to avoid even the appearance of a politically motivated decision, “I think that’s another reason to view a 50 bp cut in September as unlikely. Remember that they can just wait until the November meeting, which is just one day after the election.”

Head of Data Science Ken Xuan was inclined to agree about the likelihood of a 50 bp cut in September, but he suggested that “what we saw in the futures market is still useful as a measure of how dovishly the market interpreted the Fed’s stance after the press conference.”

Importantly, Chair Powell continued to acknowledge the progress on the inflation front. When asked to compare the recent decline with what the data showed late in 2023, Powell responded: “Actually what we're seeing now is a little better than what we saw last year. [...] This is a broader disinflation, this [still] has goods prices coming down, but it's also now seeing progress in the other two big categories – non-housing services and housing services.” 

Procedural note: Based on the rotating roster schedule, the head of the Cleveland Fed is slated to sit on the FOMC as a voting member in 2024. However, Loretta J. Mester retired from her position on June 30 due to age limits, and her successor, Beth Hammack, is not scheduled to take her place until August 21. Consequently, Chicago Fed President Austan Goolsbee voted as an alternate member at this meeting.