July FOMC Meeting Marks One Year with Stable Interest Rates

FOMC members voted to hold the Fed Funds Rate steady at this week’s meeting. This decision was so well-telegraphed that nearly 95% of analysts correctly predicted the outcome prior to the start of the meeting.

While there was no change to rates, the meeting provided important information on the future of interest rate policy. The following 5-minute summary will cover the Fed’s comments, the data behind their decision, and projections for future rate cuts.

One Year Without an Interest Rate Change

The FOMC has held interest rates steady at a target range of 5.25 – 5.50% for eight consecutive meetings – marking a full year without a change. Federal Reserve Chairman Jerome Powell explained earlier this year that the lengthy pause in monetary policy was intended to “allow restrictive policy further time to work.” In particular, the committee has focused on slowing the economy in order to reduce inflation.

In the announcement following the most recent meeting, FOMC members noted “some further progress” had been made toward their inflation goal since they last met. Chair Powell elaborated on this statement in a press conference following the announcement. He said that the second quarter inflation readings provided added confidence for FOMC members. Despite this positive language, the FOMC has not yet received enough data to support an interest rate cut.

Data Supporting the Latest FOMC Decision

The FOMC monitors a wide range of data to gauge the health of the economy and progress toward their dual mandate of achieving price stability and maximum employment. Since the last meeting, new data has shown continued economic growth, a slight weakening of the labor market, and additional progress toward moderate inflation.

A “Solid Pace” of Economic Growth

While economic growth is not part of the Fed’s mandate, FOMC members do monitor the economy for signs that monetary policy is working as intended. This appears to be the case, as the FOMC described economic activity as “continu[ing] to expand at a solid pace.”

The most recent data from the Bureau of Economic Analysis supports the committee’s interpretation. In their report, Gross Domestic Product [GDP] doubled from 1.4% in the first quarter to 2.8% in the second quarter. However, economic activity has slowed notably from the latter half of 2023 – indicating that downward pressure on demand is continuing to constrain the economy.

Slight Weakening in the Labor Market

Promoting maximum employment is one half of the Fed’s dual mandate, though they do not have a public target to quantify that goal. Chair Powell described the current labor market as “strong but not overheated.” He also announced that the labor market has returned to its pre-pandemic strength, with supply and demand of available workers coming into better balance.

The Unemployment Rate ticked up from 4.0 to 4.1% in the latest report from the Bureau of Labor Statistics, supporting Chair Powell’s assessment of the labor market. From one year ago, this rate has risen by 0.6 percentage points.

Inflation Has Moderated, But Still Remains Elevated

The other half of the Fed’s dual mandate is to promote stable prices. Their public target for this goal is an average of 2% annual inflation as measured by changes to the Personal Consumption Expenditures [PCE] price index.

While progress toward the Fed’s inflation goal has been slow, prices are moving in the right direction. The most recent report from the Bureau of Economic Analysis showed that PCE prices rose by 2.5% from one year ago – a 0.1 percentage point decline from the previous month’s reading.

Overall, the current level of restrictive interest rates appears to be putting downward pressure on demand and prices, as the Fed intended. Fortunately, the labor market and economic activity have remained relatively strong in spite of higher borrowing costs.

Projections For Interest Rates

Like previous meetings, the FOMC did not provide a timeline for potential interest rate cuts. Instead, they repeated that, “[t]he Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

Chair Powell also noted the risks associated with incorrectly timing interest rate cuts. If the Fed cuts rates too soon or by too much, they risk reversing the progress made toward their inflation goal. On the other hand, if they wait too long or leave rates too high, they could cause undue stress in the economy or labor market.

The committee remains in a wait and see approach to monetary policy – basing their decisions on incoming data. However, market analysts are more comfortable voicing their predictions.

Currently, CME FedWatch predicts a 100% chance of at least a 0.25% interest rate cut at the next meeting in September. Regardless of these predictions, the timing of the next rate cut will be determined by upcoming data and the Fed’s progress toward their stated goals.

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