MNI FED WATCH: Rates On Hold As Possible Fall Cut Considered

The Federal Reserve is expected to keep its benchmark overnight interest rate in the 4.25%-4.5% target range Wednesday as policymakers continue to inspect U.S. data for tariff pressures on prices, hiring and economic activity.

Their outlook and remarks will likely remain little changed from that of the June FOMC meeting, when one group signaled a desire to cut twice this year and another to wait until next year. 

Tariffs impact on consumer prices has been muted by firms' stockpiling and allowing costs to eat into their margins until there's some certainty on trade, while a "no hiring, no firing" sentiment has also seen any potential harm to labor markets delayed. (See: MNI INTERVIEW2: Tariffs Inflation Impact Slow To Come -Mester)

With two monthly jobs figure and two inflation reports to come before the September meeting, Fed Chair Jerome Powell may refrain from hinting at any commitment to begin cuts this fall. (See: MNI INTERVIEW: Fed Should Stay Extra Cautious On Cuts-Sinclair)

"I'm doubtful the air will clear enough by September, given how some of these (trade deal) deadlines have been pushed out and work that remains to be done with trading partners," former Atlanta Fed President Lockhart told MNI. (See: MNI INTERVIEW: Fed Cuts Likely Delayed, Sept In Doubt-Lockhart)

STILL RESTRICTIVE

That no inflation shocks have materialized underpins arguments for rate cuts to resume before year-end. Since January, headline CPI has risen 0.8% and core CPI 0.9% but core goods prices are up just 0.3%. At more than 1 percentage point above its estimated longer run rate, the fed funds rate has some room to fall. (See: MNI INTERVIEW: Fed Seen Cutting Twice This Year - English)

"They don’t have to be this far above neutral to get the remaining amount of inflation to dissipate over the next year, so they can gradually reduce the policy rate to the neutral rate," former St. Louis Fed President James Bullard told MNI. (See: MNI INTERVIEW: Early 26 Powell Exit 'Right Compromise'-Bullard)

At the same time, the resilience of the U.S. economy argues for being patient a little longer. The Atlanta Fed's GDPNow estimate for second quarter growth is 2.4% and the unemployment rate is expected to hold steady at 4.1% in July. (See: MNI INTERVIEW: Easing Price Expectations Unreliable - UMich)

Markets are favoring a first cut in September and two by year-end and another two or three by December 2026. 

Two governors, Chris Waller and Miki Bowman, have urged a cut as soon as this meeting, but any dissents from Wednesday's decision would be viewed as driven by a desire to remain contenders for the Fed chair job rather than widening divisions among committee members. (See: MNI INTERVIEW: FOMC To Go Own Way If Chair Lacks Credibility)

President Donald Trump came close to firing Powell earlier this month, after making it almost a daily routine to attack the Fed leader for not cutting rates by now. (See: MNI INTERVIEW: Powell Would Win In Court If Trump Fires Him)