In line with market expectations, the Federal Open Market Committee (FOMC) voted to keep the federal funds rate unchanged in a target range of 5.25% – 5.50%. There were no dissents. 

Changes to the FOMC Statement: 

• The economic assessment was amended to recognize that while unemployment was still low it had risen and while inflation was still high it had fallen. The statement also recognized “some further progress” toward the Fed’s inflation objective. The risk to their dual mandate “continued to move into better balance”. In addition, the statement added that they are “attentive to the risk on both sides to its dual mandate.”
• The forward guidance remained unchanged indicating that a rate cut will not be appropriate until the committee has “gained greater confidence that inflation is moving sustainably toward 2%”. 

Key Takeaways from Chair’s Press Conference:

• On inflation: Highlighted progress made in the second quarter but wants to see more good data
  • “The last couple of readings have added to confidence. We've seen progress across all three categories of core PCE inflations, goods, non-house services, and housing services. It is really just -- you know, we had a quarter of poor inflation data at beginning of the year. Then we saw some more good inflation data. We had seven months at the end of last year. We want to see more and gain confidence.”
    
    
• On the labor market: Gradually normalizing back to 2019 levels and no longer a source of inflation
  • “We think what the data broadly shows in the labor market is an ongoing, gradual, normalization of labor markets. That's what we want to see. We've seen that over a period of a couple of years. A move from over- heated to more normal conditions.”
  • “I would say again I think you're back to conditions that are close to 2019 conditions. That was not an inflationary economy. Core inflation was running below 2%. I don't think of the labor market in the current state as a likely source of significant inflationary pressures. So I would -- I would not like to see material further cooling in the labor market.”
     
• On the balance of risks: Better balanced with Committee prepared to respond to weaker employment
  • “If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.”
     
• On monetary policy: No decision has been made but we are moving closer to the point of a rate cut
  • “We have made no decisions about future meetings. That includes the September meeting. The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate. In that, we will be data dependent, but not data-point dependent…The question will be: where the totality of the data, the evolving outlook, and balance of risks are consistent with rising confidence and maintaining a solid labor market. If that test is met, the reduction of the policy rate could be on the meeting as soon as September. You asked why not today. I would just say the broad sense of the committee is we're getting closer to the point at which it will be appropriate to reduce our policy rate. They were not quite at that point yet.”

Our View:

• Since the Fed last hiked rates in July 2023, core PCE (the Fed’s preferred measure of inflation) has decelerated by over 150 basis points to 2.6% year-over-year and the unemployment rate has risen by 0.6% to 4.1%. Slowing inflation and rising unemployment support a rate cut in September.
• We continue to view the risk to Treasury yields as asymmetric with sell-offs limited relative to the potential for rallies. While current market pricing for the path of the Fed Funds rate is reasonable, assuming the economic expansion continues without any deterioration in the data, the market is underpriced for a more negative economic scenario where the Fed could cut faster than once a quarter.
• We expect the 10-year Treasury yield to move towards a range of 3.75 – 4.25% as we move towards year-end. 

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Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.