FOMC Statement and Economic Forecasts:
1. Statement Overview: A 25 basis point rate cut to 4.00%-4.25% resumes the pace of rate cuts that has been paused since December. Governor Milan believes a 50 basis point cut is appropriate.
2.
Interest Rate Outlook: The dot plot projects two more rate cuts this year. One official projects a cumulative 150 basis point rate cut this year, while one official (a non-voting member) believes no rate cuts are necessary this year. The median forecast for the federal funds rate at the end of 2025, 2026, and 2027 has been lowered to 3.6%, 3.4%, and 3.1%, respectively.
3. Labor Market: Downside risks to employment have increased, having previously stated that "labor market conditions remain solid." The median unemployment rate forecast for the next two years has been lowered to 4.4% and 4.3%, respectively.
4. Inflation Outlook: Inflation has risen but remains at a "slightly elevated" level. The PCE and core PCE inflation forecasts for the end of 2026 have been raised to 2.6%. 5. Economic Outlook: The median GDP growth forecast for the end of 2025, 2026, and 2027 has been raised to 1.6%, 1.8%, and 1.9%, respectively, with the median GDP growth forecast for the end of 2028 at 1.8%.
Powell Press Conference:
1. Interest Rate Outlook: This rate cut is a risk-management measure; there is no need for a rapid adjustment. Decisions will be made on a meeting-by-meeting basis, with data attention focused. Downside risks to the labor market will be a key focus of today's decision.
2.
Inflation Outlook: Inflation has recently risen but remains slightly elevated. Overall PCE inflation is expected to rise by 2.7% year-on-year in August, with core PCE inflation at 2.9% year-on-year. Inflation risks are tilted to the upside. The baseline scenario assumes that the impact of tariffs on inflation is short-lived. Tariffs contribute 0.3-0.4 percentage points to the core PCE price index.
3.
Economic Outlook: Economic growth has slowed, primarily reflecting a slowdown in consumer spending. The pass-through of tariffs to consumers has occurred, but has been less than expected. The labor market faces downside risks. The annual employment data revision was almost entirely in line with expectations, suggesting a weakened labor market.
4.
Political Factors: A firm commitment to the Federal Reserve's independence. In response to Milan's impact on the interest rate decision, the Fed stated that the only way a single voting member could influence the decision was by presenting a compelling argument. No other means of incorporating a "third mandate" were considered.
5.
Market Reaction: Between the announcement of the interest rate decision and Powell's speech, gold prices fluctuated significantly, reaching a new high of $3,707 before falling $60. The US dollar and US Treasury yields fell before rising, with the US dollar briefly reclaiming 97. The US Treasury 2Y erased losses of over 7 basis points. US stocks surged before falling sharply and subsequently maintained a slight decline.
6. Latest Forecast: As of press time, interest rate futures are pricing in a further 45 basis points of rate cuts this year and approximately 72 basis points next year. The probability of the Fed remaining on hold in October is 13.3%.
