Even if the Federal Reserve is about to cut interest rates, don't expect it to release a clear signal!

Most economists predict that the Federal Reserve will not cut interest rates at this week's meeting, but is likely to lay the groundwork for a rate cut in September. Since July 2023, the Fed's benchmark short-term interest rate has been held at a 23-year high of 5.25% to 5.5% to wait for further cooling of inflation. The annual inflation rate in June has dropped to 3%, much lower than the 20-year high of 9.1% in June 2022, but still above the Fed's target of 2%. The core inflation rate, excluding volatile food and energy prices, has dropped to 3.3%, the lowest since April 2021. Most economists expect that at the end of the two-day policy meeting on Wednesday, the Fed will hint at considering a rate cut soon. They believe that inflation is moving in the right direction, and the inflation reports in the next two months will provide room for the Fed to lower rates. However, "the hint will be subtle," wrote Ryan Sweet, Chief U.S. Economist at Oxford Economics, in a note, "those hoping for a clear signal will be disappointed." Interest rates are the main tool the Fed uses to reduce inflation. High rates make borrowing more expensive, slowing down spending and the economy, which typically helps ease inflation. Why can't the Fed provide a clear timetable for rate cuts? James Knightley, Chief International Economist at ING, said, "Inflation easing is a 'necessary condition' for a rate cut in September, but that alone is not enough." He said the Fed also needs to see more evidence of weakness in the labor market and consumer spending. BeiChen Lin, Investment Strategist at Russell Investments, pointed out, "We have seen multiple times in this cycle that the pace of anti-inflation measures is non-linear. Given the relatively strong labor market and economic activity in the U.S. at present, I think Powell may only give subtle hints about policy actions in September." Knightley noted that the unemployment rate rose from 4% in May to 4.1% in June, the highest since November 2021, mainly because more people are actively looking for work rather than being unemployed. Meanwhile, consumer spending remains resilient, with an annualized growth rate of 2.3% from April to June, still higher than the 1.5% at the beginning of the year, slightly lower than the growth rate of over 3% in the second half of 2023. What will the Fed say? Gregory Daco, Chief Economist at Parthenon EY, wrote in a report, "The Fed may 'be more confident' that inflation is continuing towards 2%." Sweet said, "It is worth noting that Powell has already begun to emphasize that if the Fed waits too long or is too cautious in cutting rates, the economy and labor market will face downside risks." " JP Morgan's chief US economist Michael Feroli pointed out in a report: "Although recent economic data has shown resilience, consumers' fundamentals may not be as solid as they once appeared." Feroli explained that due to weak income growth after adjusting for inflation, the savings rate dropped to an 18-month low of 3.4% in June, making it difficult for low-income families to make ends meet. The already low confidence index is also declining, and the number of initial jobless claims is on the rise. Coupled with slowing inflation, it appears that the Federal Reserve's two main goals - maximum employment and price stability - are coming back into balance, with economists expecting the Fed to acknowledge this. However, they also noted that the Fed needs to see more data to confirm. Swiatek expects the Fed to state, "Although the unemployment rate has risen, it remains at historically low levels, inflation has eased somewhat, but remains above the committee's 2% target." When will the Fed give a clearer signal of a rate cut? Powell will have another opportunity to discuss interest rate issues at the meeting in Jackson Hole, Wyoming, from August 22 to 24, where officials and economists from around the world will discuss policy. Stephen Brown, North American Deputy Chief Economist at Capital Economics, said in a report that the Fed may change its wording this week "to reflect the increasing likelihood of a rate cut at the next meeting, (but) we doubt he will wait until the Jackson Hole symposium in August to more clearly signal a rate cut." "