What you need to know

This week’s Federal Reserve meeting is less about the present and possibly a lot about the future.

If all goes according to expectations, policymakers will again keep short-term interest rates at approximately the same level as last year.

But with a slew of concurrent inflation data in hand in recent months, central bankers are widely expected to lay the groundwork for rate cuts starting in September. How aggressive they are in spreading those breadcrumbs is the key question the markets will want to answer.

“Our expectation is that they will keep rates unchanged,” said Michael Reynolds, vice president of investment strategy at Glenmede. ‘But there will be a lot of attention for the [post-meeting] statement, perhaps heralding September as the opposite of launch.”

Market prices currently indicate an absolute certainty that the Fed will approve its first cut in more than four years – at its September 17-18 meeting. The central bank has kept its benchmark interest rate within a range of 5.25%-5.5% over the past year. The rate represents what banks charge each other for overnight loans, but provides guidance for a range of other consumer debt products.

As for this week’s meeting, which concludes on Wednesday, traders are pointing to a very remote possibility of a cut. However, there are expectations that the rate-setting Federal Open Market Committee will drop signals that as long as there are no major data problems, a move in September is very likely on the table.

Reynolds thinks the committee, along with Chairman Jerome Powell at his news conference, will want to keep its options at least somewhat open.

“They’re going to want to find a balance. They don’t want investors to start pricing in a rate cut in September and literally nothing else can happen,” he said.

“Opening the door to that rate cut is probably the most appropriate thing for them at this point in time,” Reynolds added. “But the markets are already quite excited about that and are pricing it in with almost 100% probability. So the Fed doesn’t have to do too much to change the narrative about that. I think if they just change the statement directionally, it will get the job done.”

Glenmede expects the Fed to make cuts at each of the three remaining meetings starting in September. This is largely in line with market expectations, as measured by the FedWatch from CME gauge for the pricing of 30-day Fed Funds futures contracts.

There are a few ways the Fed can steer the markets based on its likely intentions without taking on too many liabilities. Subtle language changes in the statement could help, and Powell can be expected to have some scripted responses ready before the press conference to convey the likely path of future policy.

Economists at Goldman Sachs see the FOMC making some changes.

A crucial change could be a line in the statement it states that the committee will not lower interest rates until it has “gained more confidence that inflation is heading sustainably towards 2 percent.” Goldman Sachs economist David Mericle expects the Fed to qualify this statement by saying all it needs now is “a little more confidence” to start easing.

“Recent comments from Fed officials suggest they will remain on hold during their meeting [this] but have moved closer to a first rate cut,” Mericle said in a note. “The main reason the FOMC is closer to a rate cut is the favorable inflation news from May and June.”

Inflation news has indeed improved, but is still not great. By most measures, the pace of price increases is still half a percentage point or more above the Fed’s target, but they have slowed sharply from their mid-2022 peaks. The Fed’s preferred measure, the personal income price index consumer spending, showed an annual inflation rate of 2.5% in June; the consumer price index was 3% and showed an actual decrease of 0.1% compared to the previous month.

Don’t expect too much enthusiasm from Fed officials, though.

“Inflation rates have risen significantly this year,” said Bill English, a former Fed director of monetary affairs and now a professor at Yale. “We had some pretty high numbers last winter. We’ve had good data for a few months now. But I think they’re really uncertain about exactly where inflation is and where it’s going.”

English expects the Fed to hint at action in September, but stops short of providing a detailed roadmap of what’s next.

Central bankers especially feel they can be patient with policy as inflation eases and broader measures of economic growth continue to show strength despite the highest interest rates in 23 years. For example, gross domestic product accelerated by a better-than-expected 2.8% annualized in the second quarter, and the labor market was also strong, even with the unemployment rate moving higher.

“Given where the inflation is, given where the economy is, it is appropriate to ease, but this should not be seen as a commitment to a whole chain of easing,” English said. “It’s difficult to communicate clearly about where monetary policy is going.”

The central bank will not provide an update on its quarterly review of economic projections at this meeting. This includes the dot plot of individual interest rate expectations, as well as informal forecasts of GDP, inflation and unemployment.

The FOMC does not meet in August, except on his annual retreat in Jackson Hole, Wyoming, where a keynote policy address from the chairman is traditionally delivered.