The US Federal Reserve is gearing up for the September policy meeting, with markets watching closely for any signal on the trajectory of interest rates. Bets on a December move are tempered as prices imply a pause between 5.25% and 5.50%. Investors expect fresh economic projections to guide the board led by Jerome Powell. A pause would reflect a slower, more cautious stance and mirrors recent steps by Europe’s central bank. The European Central Bank recently raised rates by 0.25 percentage points and indicated this could mark a pause in further increases.
Powell has guided rate hikes through ten straight meetings, each aimed at cooling inflation while supporting the economy. The typical move has involved quarter- to three-quarter-point increments. After the June collapse of Silicon Valley Bank and Signature Bank, the Fed paused to avoid destabilizing midsize lenders. The quarterly dot plot showed most policymakers still expected two more quarter-point increases by year-end, with one already enacted in July.
Analysts suggest that a lack of fresh economic data could push policymakers toward delaying a second September move. Michael Feroli, economist at JPMorgan, notes that committee members may prefer not to disrupt a fragile balance that has been working. While US growth has surprised to the upside in recent months, inflation trends, especially in services, and easing labor market pressures remain key signals for policy direction, according to Franck Dixmier, global investment director at Allianz Global Investors Fixed Income.
Economy flexibility
The latest August inflation reading stood at 3.7 percent, a touch higher than forecast and the second consecutive year-over-year uptick after prior declines. This reads suggests price growth has slowed more slowly than hoped. The services sector PMI has slipped since May and remains vulnerable to further declines, a concern for the outlook on demand and prices.
Beyond consumer spending and broader activity, market participants stay alert to global pressures. US debt surpasses 123 percent of GDP, while the federal deficit sits around 5 percent of GDP. Analysts from Bank of America note that disinflation momentum remains but inflation risks rise if demand stays elevated. Rates are projected to stay higher than initially expected into 2024, reflecting a persistent policy stance.
Macro strategy teams see a scenario where keeping rates high for longer could dampen underlying inflation but also strain fiscal conditions and sovereign market dynamics. If rates stay elevated for an extended period, real yields could weigh on equity valuations and earnings growth, suggesting the first rate cut might not occur until mid-2024. Some institutions anticipate only a modest reduction next year, with the neutral rate moving slightly higher, signaling a carefully calibrated policy path that curbs inflation without triggering a sharp slowdown in growth.
Interest rate increase in Europe
The ECB signaled a potential end to the current tightening cycle at its last decision, arguing that monetary conditions should remain sufficiently restrictive as long as necessary. Officials described the rate path as data dependent, ensuring that policy stays aligned with the inflation outlook and the pace of the recovery. The Governing Council did not reach a unanimous vote on the decision, underscoring the diversity of views within the committee. Some members advocated caution and more time to assess incoming data before any further moves, while others supported keeping a steady course to preserve a disciplined framework for inflation targeting.
Central bankers acknowledge that the market is shifting from speculation about future increases to assessing the size and timing of the next steps. Lagarde has emphasized that the rate path will be guided by data and the evolving inflation picture, without pre-committing to a fixed number of future adjustments. The focus remains on balancing price stability with the need to support growth and employment, while avoiding unnecessary volatility in government debt and financial markets. The discussion signals a cautious approach, with any potential cuts planned for the second half of 2024 depending on inflation trends and growth momentum.