Market Analysis

Strong Indications of Rate Cut from Fed Chairman

Amos Simanungkalit · 01 Aug 20247K Views

The Federal Reserve’s Federal Open Market Committee (FOMC) has decided to keep the federal funds rate (FFR) within the existing range of 5.25-5.50% following its recent end-July 2024 meeting. This decision, in line with market expectations, reflects the ongoing strength of the broader US economy despite inflation remaining above the Fed’s 2% target.

In its statement, the FOMC noted that while inflation has moderated, it remains “somewhat elevated.” Recent data show further progress towards the Fed’s 2% inflation target. Headline PCE inflation eased to 2.5% year-on-year in June 2024, marking the lowest level since 2021 and returning to levels seen earlier this year. Core PCE inflation, at 2.6% year-on-year in June 2024, also indicates a broad moderation in underlying inflationary pressures.

Federal Reserve Chairman Jerome Powell signaled the possibility of interest rate cuts in the next meeting, contingent on continued moderation in US inflation. While the Fed emphasizes reliance on incoming data for policy decisions, Powell dismissed the notion of a 50-basis point cut. Nonetheless, the dovish tone suggests that the Fed may be nearing its first rate cut since the last hike in July 2023.

Although the recent FOMC meeting did not include an economic projection update, the statement highlighted robust growth in the US economy. The Beige Book report noted more districts experiencing flat or slower economic activity. However, stronger-than-expected GDP growth, at an annualized 2.8% quarter-on-quarter in Q2 2024 (Q1 2024: 1.4%), underscores the economy’s resilience, driven by a rebound in consumer spending and robust non-residential investment.

Powell stated that the US job market has returned to a better balance, akin to pre-pandemic conditions. The jobless rate has risen to a nearly three-year high of 4.1%, accompanied by a high participation rate. Wage growth, measured by average hourly earnings, has slowed to 3.9% year-on-year in June 2024, the slowest since mid-2021. The cooling labor market and wage growth support the Fed’s stance on potential monetary easing.

Consumer spending continues to bolster US economic growth, with retail sales growing by 2.5% year-on-year in Q2 2024 (Q1 2024: 2.0%). This aligns with the rise in personal consumption expenditures within Q2 2024 GDP, as Americans increased their spending on goods. Despite concerns about the short-term economic outlook due to high prices, upcoming elections, and ongoing geopolitical conflicts, consumer sentiment has not sharply declined, suggesting continued support for economic growth.

The Fed is expected to start cutting its FFR in the latter part of the second half of 2024, possibly implementing 1-2 rate cuts. The broad moderation in US inflation indicates that the Fed is moving closer to rate cuts. This expectation is based on signals from Powell that a rate cut may occur as early as the next FOMC meeting in September 2024. However, if inflation remains stubbornly elevated, the Fed may delay easing its highly restrictive policy. Currently, the reduced need to maintain a restrictive policy setting as inflation nears the 2% target suggests potential policy easing this year.