By Blerina Uruci, chief US economist at T. Rowe Price
I expect the FOMC to cut interest rates by 50bp at its meeting on Wednesday, in what is a very close call. There is an unusual degree of uncertainty about the size of the policy easing, with markets pricing the decision between a 25bp and 50bp cut as a coin flip.
This level of uncertainty goes against Fed Chair Jerome Powell’s earlier assertion that the timing and size of the first cut in this cycle is consequential, which implied the first cut would be well-telegraphed by FOMC communications. In addition, FOMC communications around the time of Powell’s Jackson Hole speech seemed to converge toward support for a methodical pace of 25bp cuts per meeting this year, in response to recent labour market cooling and slowing inflation.
FOMC communications ahead of the quiet period did not indicate the FOMC intended to lead with a 50bp cut, which puts into question how the committee is interpreting labour market data and further increases in the unemployment rate.
I expect the median FOMC dot will show 100bp of cuts in 2024 and another 100bp in 2025, leaving interest rates slightly above the FOMC’s estimate of the long-term rate of 2.8%. I seem to have a more benign interpretation of recent economic and labour market data and maintain my view the Fed is likely to cut by about 125–150bp over the next 12 months, versus market pricing of 250bp. In addition, if the Fed front loads policy action and financial conditions ease further after the September meeting, it will provide further support to the economy and arrest any nascent cycle of deceleration.
