Please find below a new comment from Xiao Cui, Senior Economist, at Pictet Wealth Management, tomorrow’s Fed meeting:
We expect the Fed to leave rates unchanged this Wednesday but to note further progress on inflation and hint at a September rate cut (through statement or pressor, there’s no SEP). The latest (dis)inflation prints, a cooling labor market, and a risk-management approach with a desire for a soft landing all argue for a start to the easing cycle in September. However, there’s little upside for Powell to strongly signal a September cut given 1) markets have priced in a little more than 25bps by the September meeting 2) Powell can use Jackson Hole in late August to send a message and 3) ”meeting-by-meeting” approach means data dependency.
We expect two 25bps rate cuts, in September and December. Markets are pricing closer to three cuts this year. We agree with the direction of risk given the slowdown in inflation and especially the cooling in the labor market. But until we see more deterioration in labor demand and a rise in layoffs (not merely normalization), we would still expect a quarterly pace of cuts. There is some downside risk to payrolls this week from Hurricane Beryl, which hit Texas and was behind some of the recent rise in jobless claims.
