The Federal Reserve met investors’ expectations by keeping interest rates in the 5.25 to 5.50 percent range for the eighth consecutive meeting, as stated in a Wednesday press release. Market expectations now place a high probability on the first rate cut after the summer, with traders pricing in a 98.2 percent chance of a easing move at the September meeting. A 25 basis point reduction remains the baseline, with a 91.6 percent probability, though there is a 6.6 percent chance of a half-point cut and a mere 1.9 percent view that no cut will occur.
The tone in the latest Fed statement has shifted to a softer stance, moving away from labeling inflation as “elevated” to describing it as “somewhat elevated.” It also notes that there have been some “further advances” in price growth in recent months. This shift has reinforced market confidence that a first cut could arrive in September, a view that has strengthened in recent weeks. A month ago, the probability of a cut stood at 70.2 percent, with 29.8 percent favoring maintaining the current rate. Analysts remain divided on the magnitude of the cut, with most expecting a full percentage point or a 100 basis point reduction to be unlikely in a single move, according to the CME Group FedWatch tool.
Recent macro data in the United States have supported a rate decline. Inflation remains near the 2 percent target, while job creation has cooled somewhat in recent months. Manufacturing and industrial activity indices show signs of slowing as well. Despite these trends, the Fed has chosen to remain cautious and has allowed a couple more months to assess the first rate adjustment. The central bank noted that any change to the target range for the federal funds rate will be made after careful consideration of incoming data, evolving outlooks, and the balance of risks.
GDP, unemployment, and inflation data point to a resilient economy. The U.S. economy grew at an annualized rate of 2.8 percent in the second quarter of 2024, up from 1.4 percent in the prior quarter. Nonfarm payrolls rose by 206,000 in June, yet the unemployment rate ticked up to 4.1 percent. This marks the United States’ 42nd consecutive month of job creation. Personal consumption expenditures, the metric the Fed prefers for measuring inflation, stood at 2.5 percent in June, a tenth below May. The monthly figure rose 0.1 percent, while the trimmed mean measure held at 2.6 percent year over year. These metrics collectively paint a cautious but steady path toward the Fed’s inflation objective, allowing for deliberate policy moves as new data arrive.