The Federal Reserve completed its July meeting today. As usual, they put out a press release and Chairman Powell had a press conference. A few bullet points to understand the situation:

– The Fed kept rates unchanged for now. This was expected.

– The language surrounding employment gains, the unemployment rate, and inflation was softened in the press release. This signals greater consideration towards lowering the fed funds rate.

– The Fed has spoken extensively in recent years about getting inflation under control. This press release noted that full employment is part of their mandate. Again, this signals a greater willingness to cut.

– There was continued language about “moving sustainably towards 2 percent” inflation. That again means they’ll be willing to cut before the CPI, PCE, and other inflation metrics come down to 2%.

– During the press conference, Powell was clear that the Fed is considering a September rate cut. He left himself room and noted that zero cuts this year was still a possibility, but specifying a possible September cut was more clear and definitive than he’s been this entire cycle. This clarity was not an accident.

My conclusions:

– If I were in charge, I wouldn’t cut now. I believe that the private market economy is struggling. This is being offset by trillions of dollars of government stimulus spending that’s keeping inflation elevated and crowding out the private market economy. I continue to believe that inflation as experienced by most American families remains well above the current 3% CPI which itself is too high. As long as the government is creating inflation and as long as inflation remains elevated (and understated), the Fed is risking a damaging resurgence of inflation if they cut now. Second half comparisons are also much tougher meaning that even if prices don’t rise much from current levels, we would expect to see higher inflation metrics. Congressional spending cuts would do more to help than Fed rate cuts. That’s definitely not going to happen.

– I’m not in charge and in this situation, my opinion of what “should” happen doesn’t matter. While Powell left himself room to delay any rate cuts, the mention of a September cut was intentional. At this point, it’s more likely than not that the Fed cuts by 25bp in two months. They are signaling they are willing to cut just ahead of the election, but a 25bp cut in September isn’t going to change the whole economy for an early November election.

– “Higher for longer” just became “sooner rather than later”.

 

IR@DeepKnowledgeInvesting.com if you have any questions.

 

 

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