Fed leaves interest rates unchanged, as expected

But pressure to cut rates is building; first move could come in September.

01 August 2024

The Federal Reserve (Fed) left interest rates unchanged, with the upper bound discount rate at 5.5%, exactly where it has been for a year now. Pressure to cut rates is mounting, with the swaps market predicting fully three cuts of 25 basis points each by the end of January 2025. For the Fed, it is no slam dunk though. Credibility matters, a lot and the sting of 2022's belated rate hikes - after passing inflation off as “transitory” for too long - can still be felt. The slightly smaller, but more recent, humiliation is the much-vaunted 'pivot' at the end of 2023 in which Chair Powell declared that loosening was not far off now, only to see the economy strengthen and the rate of disinflation slow to a crawl.

Last week's core PCE inflation reading of 2.6% (versus 2.5% expectation), the last non-farm payrolls showing over 200k jobs added, and the latest US GDP growth rate of 2.8% are not helpful either. But the need to declare victory and perhaps start addressing some (limited) signs of consumer weakness, such as credit card delinquency and pessimistic sentiment surveys, is beginning to grow. If the economy softens and inflation eases further, but the Fed has done nothing in the meantime, that will be seen as sleepwalking into an effective tightening of policy and the dreaded words 'policy error' will start to circulate. Today's decision may not have been a surprise, and the Fed emphasised "patience", but to say that September's meeting will be very closely watched would be an understatement.