July Statement Alludes to Possible September Rate Cut, Does Not Commit

Yesterday, as expected, the Fed opted to keep rates unchanged for the eighth consecutive meeting in a range of 5.25-5.50%.

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In the statement, the Fed noted that job gains have “moderated,” and?while there has been a “rise”?in the unemployment rate, the level of joblessness remains “low.”?

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On the inflation front, there appears to be a more improved assessment, somewhat, among policy makers. “In recent months,”?the statement reads, “there has been some?further progress towards the Committees 2% objective,” but inflation still remains “somewhat elevated.”

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The Committee judges that the risk profile between its employment and inflation goals “continue to move into better balance,” although the statement stopped short of indicating such a balance has been met.?As such, rather than focusing on just inflation risks, the Committee says it will be “attentive to the risks on both sides of its dual mandate.”

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Most importantly, the Committee reiterated a hesitancy to adjust policy without further evidence of a sustained disinflationary trend. “The 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.”

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Bottom Line: The July FOMC statement offered no guarantee of a September rate cut, falling short?of the market’s expectations for a commitment to policy easing in just 48 days’ time.?While a September rate cut is still a possibility and very much on the table, the statement suggests the Fed remains data dependent and furthermore, that policy makers are not yet convinced by recent reports that price pressures will continue to moderate, or that labor market conditions have cooled enough to warrant an adjustment in the current policy stance.

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Progress has been made but the Committee is looking for additional indications of sustainable?progress back towards the 2% inflation?objective.?That’s not to say the Fed needs to or will wait until 2% is met, but the trajectory of inflation still remains bumpy and uneven at best. With just two months of downward momentum in the headline PCE, coupled with further sideways movement in the core, policy makers, desperate to provide relief, will continue to put a heightened level of importance on the incoming data between now and the September 18 FOMC meeting.?

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That being said, it appears the onus is on the data to convince policy makers not to move come September.?Meaning any further minimal progress in price pressures is likely enough to offer the needed justification to cut rates.?After all, as Powell indicated during the press conference, the economy is in a relatively good spot and the Fed would like to perpetuate and support current conditions.?Furthermore, with the progress thus far in price pressures, the Fed no longer needs to focus entirely on its price stability goals. “We're getting closer to the point at which it'll be appropriate to reduce our policy rate, but we're not quite at that point,” Powell said.?

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Despite a lack of commitment, investors are still pricing in a September rate cut at near certainty.?The 10-year UST yield, meanwhile, is down 6bps at 3.97% as of 10:38 a.m. ET.

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On the heels of the Fed’s decision, the Bank of England (BOE) cut rates 25bps to 5.00%, marking the first rate cut since early 2020.

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Back in the U.S., as investors continue to digest the Fed’s latest commentary, all eyes now shift to tomorrow’s employment report as the first of several data points between now and the September meeting that will continue to tilt the rate policy tables in one direction or the other.

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After a larger-than-expected gain of 206k in June, nonfarm payrolls are expected to rise a more muted 175k in July, potentially marking a three-month low. The three-month average, however, will potentially rise from 177k to 200k.

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The unemployment rate, meanwhile, is expected remain at 4.1% for the second consecutive month, still well below what the Fed designates as the full unemployment range, and perpetuating the notion of ongoing tight-ish labor market conditions.

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Average hourly earnings are expected to rise 0.3% in July, following a similar gain in June, potentially resulting in a 3.7% increase over the past 12 months. While still minimally robust, this would mark a decline from a 3.9% annual gain reported in June. ?

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On the economic data front, yesterday, MBA mortgage applications fell 3.9% in the week ending July 26 following a 2.2% decline the week prior. The 30-year mortgage rate, meanwhile, was unchanged at 6.82% for the second consecutive week.

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Also yesterday, private payrolls, according to ADP, rose 122k in July, falling short of the 150k gain expected and the smallest increase since January. The three-month average, meanwhile, declined from 167k to 145k, the lowest since the start of the year. According to the report, those who changed jobs received a 7.2% pay increase, down from 7.7% the month prior, while those who stayed at their current position saw a 4.8% pay gain, down slightly from 4.9% in June.

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Additionally, the Employment Cost Index (ECI) – which measures both wages and benefits – rose 0.9% in the second quarter, slightly less than the 1.0% gain expected and the smallest gain in two quarters.

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Also yesterday, the Chicago PMI fell from 47.4 to a reading of 45.3 in July, a two-month low. According to the median forecast, the index was expected to decline to 45.0 in July. In the details of the report, prices paid and supplier deliveries rose, signaling expansion, while production, inventories, new orders, employment, and order backlogs fell, signaling contraction.

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Finally, yesterday, pending home sales rose 4.8% in June, the largest increase since December and following a 1.9% decline the month prior. According to the median forecast, pending home sales were expected to rise 1.5%. Over the past 12 months, pending home sales fell 7.8%, marking the 31st consecutive month of decline.

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This morning, initial jobless claims rose 14k from 235k to 249k in the week ending July 27, the highest in a year. The four-week average increased from 236k to 238k. Containing claims, or a measure of the total number of people receiving unemployment benefits, rose from 1.84M to 1.88M in the week ending July 20, the highest since November 2021.

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Also this morning, nonfarm productivity rose 2.3% in the second quarter, more than the 1.8% gain expected and the largest increase since Q4 2023. Unit labor costs rose 0.9% in the second quarter, less than the 1.7% increase expected and the weakest pace in two quarters.

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On the manufacturing side, the final July print of the S&P Global U.S. Manufacturing Index ticked up slightly from 49.5 to 49.6.

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The ISM Manufacturing Index, on the other hand, unexpectedly fell from 48.5 to 46.8 in July, now marking the fourth consecutive month in contractionary territory (a reading below 50) and the lowest reading in eight months. According to the median forecast, the index was expected to rise to 48.8.

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In the details of the report, supplier deliveries rose from 49.8 to 52.6, the highest reading since August 2022, and prices paid rose by 0.8 points to 52.9 in July, a two-month high and averaging 55.2 over the past six months. On the other hand, new orders fell 1.9 points to 47.4, a two-month low, employment declined nearly six points to 43.4 in July, the lowest reading in four years. Also, inventories fell from 45.4 to 44.5, production slipped 2.6 points to 45.9, while backlog of orders remained steady at 41.7 in July for the second consecutive month.

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-Lindsey Piegza, Ph.D., Chief Economist