In July meeting, the Federal Reserve (Fed) maintained its key interest rate at 5.25% to 5.5%, citing progress toward its 2% inflation objective. The Fed has stated that recent data has provided officials with the conviction to lower benchmark rates, but they are awaiting a continuation before doing so in their upcoming meeting in September.
The FOMC observed deterioration in labor-market conditions, with job gains moderated and the unemployment rate moving up but remaining low. The data reported by federal governments demonstrates the labor market's weakness, as job growth is primarily driven by government and part-time employment and private sector lagging. Government job openings have surged to near all-time highs in recent months, while job openings continue to decline, as per BLS data. BLS reported that the employment rate in the economy has slowed to a level not seen since 2014, despite the fact that layoff activity remained subdued in June. The percentage of unemployed workers who have gone without roles for 27 weeks or more has recently begun to surge, with about 1.5 million total workers now in that category.
Fed Chair stated that a rate cut in September "could be considered," provided that the inflation data follow a downward path towards its 2% target. Data from the financial services company CME Group indicates that Wall Street traders have been indicating for weeks that a September rate cut is a virtual certainty. In the September meeting, the CME Fedwatch tool indicates an 88% likelihood of a 25 basis point rate cut and an 11% likelihood of 50 basis point rate cuts. However, Powell seems to have rule out the likelihood of a 50 basis-point rate reduction. Here arise a situation to draw contrast between real time data and market probability. Jerome Powell was asked if he believed that the rate cut in September was the base case at this time. He responded, "There is nothing that is certain in our business."
The FOMC's upcoming meeting is scheduled for September 17-18, which is in close proximity to the presidential election on November 5. Any rate reduction could be perceived as political bias, leading to the conclusion that a rate reduction prior to the election could potentially benefit the incumbent party. This topic was raised during a FOMC briefing and the governor responded defensively, stating that any actions before or after an election will be based on data.
Following the press briefing US Dow Jones, S&P 500 and Nasdaq Composite Index rose. Domestic market also made positive opening and Nifty achieved new all time high, discounting news that RBI will also follow path.
