FOMC Keeps Cuts On The Table
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Economics Research
14 Jun 2024
US: May inflation data should give Fed comfort; We believe 2 cuts in 2024 remain on the table
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US: Fed tilts hawkish; we still anticipate two cuts in 2024. Back in their March meeting, the Federal Open Market Committee’s (FOMC) members were almost evenly split between two and three rate cuts, slightly tilting toward three. In their June meeting, they remained close to evenly split between one and two cuts, this time tilting marginally towards one. Revising up end 2024 core inflation forecast by 20 bps to 2.8%, they signalled slower-than-anticipated progress towards the 2% inflation target. However, May inflation data (CPI was flat m/m) released the same day as the FOMC meeting should give some comfort to the inflation picture. Fed Chair Powell, in his press conference, saw the latest data positively but stressed that more progress needed to be seen.
By the time the September policy meeting takes place, we believe there will be plenty of data available for FOMC members to see that inflation worries have abated largely; From manufacturers’ input price to insurance costs, rentals to medical services, as well pump price of gasoline, there is room for a stable or receding inflation outcome in the coming months. In this scenario, a September cut could be readily followed by one in December.
We concede that the two rate cuts scenario is not materially more likely than the one-cut scenario. In fact, at the tail end of the probability distribution looms a no-cut scenario, taking into account the possibility that soaring asset prices could spill over into consumer prices, along with a still-strong labour market.
When the rate cut comes, it will not be one reflecting great worries about jobs or financial stability, but rather one aimed at keeping real interest rates stable. It could therefore signal a shallow rate cut cycle through 2025, something the markets would have to reckon with eventually. For now, the key issue is the timing of the first cut in this cycle - we maintain our stance on September.
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