Chair Jay Powell described the Fed’s decision to lower its target range for the federal funds rate as “a risk-management cut.” In other words, the move was meant to address growing risks to the job market, even though inflation risks remained tilted to the upside. Powell acknowledged there is a wide range of views among Fed policymakers about whether to cut rates further this year. But he stated that such diversity of views is “very unsurprising,” given what he called the “highly unusual” circumstances the Federal Open Market Committee—or FOMC—now faces. We read his remarks as suggesting that a rate cut in October, while a reasonable base case, may not be as likely as currently implied by market pricing. Let’s take a closer look.
When addressing the main rationale for the rate cut, the FOMC’s policy statement characterized it as a “shift in the balance of risks” around its two goals: price stability and maximum employment. During the press conference, Powell repeated the statement’s language that downside risks to employment had increased, but he added that “the risks of higher and more persistent inflation have probably become a little less.” Still, he made it clear the risks are “not quite at equality,” suggesting that upside risks to inflation remained somewhat greater than downside risks to employment.
Powell pointed out several times that the FOMC is facing “quite an unusual situation,” because its two policy goals are currently “in tension.” Referring to the so-called “dot plot,” which summarizes policymakers’ views of where rates should go, he noted that it should not be surprising those views are currently so dispersed. In fact, we noticed that, if it weren’t for newly appointed Governor Stephen Miran, the group would have been evenly split between those who favored two additional 25-basis-point cuts this year, and those who favored, at most, only one more.
Commenting on the outlook for policy, Powell emphasized that the Committee is “in a meeting-by-meeting situation.” We take that to mean a higher-than-usual sensitivity to incoming data as they weigh the risks around their two goals. Given the potential for data surprises between now and the October meeting however, the chances of another rate cut in October may not be as high as current market pricing implies, particularly for a Committee that seems nearly evenly divided on what to do at its two remaining meetings this year.
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