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Monthly Cash Review May 2024 (USD)

So When Will the Fed Begin Easing?

The jobs market continues to be strong. The May payrolls reports showed a far-larger-than-expected 272k surge in employment. So when will the Fed begin easing? Certainly not in July. It could happen at the next meeting in September, but the election calendar gets in the way.

Portfolio Strategist

The US Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) chose to maintain its policy rate on Wednesday (12 June), as expected.

So much of the commentary leading up to the meeting was focused on the Dot Plot – a measure of how Fed officials think about the future path of policy rates, a form of “forward guidance.”

The Dots tell us that the Fed is generally thinking of maintaining higher rates for longer, with the “long-term” Dots showing policy rates at 2.75%, 25 basis points higher than the 2.5% we have been seeing since 2019. The Dot Plot should be taken with a major grain of salt as Fed officials’ views will likely shift with each new economic data print, but in general it is still indicative of how the Committee is thinking about keeping policy rates higher for the next couple of years.

We believe the Fed should begin cutting sooner rather than later to preserve a soft landing. Chair Jerome Powell was asked a similar question in the press conference following the rate decision and he was very balanced in his responses, admitting that, while inflation has eased notably in the past two years, the Committee is looking for further favorable inflation data before starting to ease. At this point, it seems unlikely that we will get a cut before the November meeting, which is after the election; in fact, the November meeting was moved to a Wednesday–Thursday meeting specifically to avoid being on election day.

Because of the favorable consumer price index (CPI) print on the day of the FOMC meeting, the meeting was received as being more balanced. If we had not had that print, then Chair Powell’s comments, as well as the change in the Dot Plot (which is now showing just one cut for this year), would have been interpreted as being more hawkish. Instead, these two developments offset each other, and markets seem to be taking the news in stride rather than reacting dramatically in either direction.

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