La Française: The Fed is confident that inflation is on track for 2% target

30 juli 2024

Fed

The Federal Open Market Committee (FOMC) is widely expected to maintain the federal funds target range steady at its July meeting. We believe that Fed Chair Powell will indicate that a reassuring inflation outlook and a labor market back in balance could open the door to less restrictive monetary policy, but more disinflation evidence is still needed.

This is what we expect:

The Federal Reserve to keep the interest rate unchanged with a target range of 5.25% to 5.50%, steady since July 2023.
The Fed to continue to follow a data-dependent and meeting-by-meeting approach.
Chair Powell to underline that the risks of monetary policy to the American economy are two-sided (between upside risk to inflation and downside risk to employment).
The Fed’s Powell should adopt an optimistic tone about the inflation outlook, especially given the core CPI for June which provides further proof that the disinflationary trajectory has resumed after price reacceleration at the start of the year and that there are signs of broad-based inflation deceleration.
Concerning employment, Mr. Powell to indicate that the labor market, still strong, is back in balance compared to the pre-pandemic period. He is likely to repeat that the FOMC is ready to act if the job market deteriorates 'unexpectedly' (i.e., driven by layoffs).

In summary, the FOMC should signal that inflation figures since April and labor market normalization indicate that the U.S. economy is moving sustainably back to 2% inflation. Consequently, Jerome Powell is likely to set the table for future interest rate cuts, and maybe as early as September (which is already widely expected by financial markets), while underlining a data-dependent approach. We believe that the Fed will communicate more clearly on imminent monetary easing (if data warranted) at the upcoming Jackson Hole symposium in late August.