As the Federal Reserve’s September 18 meeting nears, the focus is on whether the Fed will cut rates and by how much. According to the CME’s FedWatch tool, there is a 57% chance of a 0.25% cut and a 43% chance of a 0.5% cut. This tool, which analyzes interest rate futures to predict FOMC decisions, shows no chance of rates remaining unchanged. The market clearly expects some form of rate cut.
Upcoming Economic Data to Watch
Key economic indicators before the FOMC meeting could refine these expectations. The Employment Situation Report for August, set for release on September 6, is crucial.
Over the past year, the employment rate has increased, which could signal a recession on some metrics. However, there is debate about the reliability of the unemployment data.
Federal Reserve Governor Michelle Bowman recently highlighted concerns about the data. She noted that the Quarterly Census of Employment and Wages (QCEW) shows job gains have been overstated since March of last year.
Also, the household survey’s unemployment data has become less accurate as response rates have declined since the pandemic.
This discrepancy raises questions about the real state of the labor market, making the upcoming employment report even more important for the Fed’s decision on rate cuts.
If the August employment report shows continued softness in the labor market, it could support a 0.5% rate cut. If it shows recovery in job prospects after temporary factors like Hurricane Beryl in July, a smaller 0.25% cut is more likely.
Inflation Data Could Also Play a Role
Another key release is the Consumer Price Index (CPI) report for August, due on September 11. While inflation is still above the Fed’s 2% target, there are signs of cooling. If the CPI report shows further slowing inflation, it could support a larger rate cut.
However, if inflation is higher than expected, the Fed may lean toward a smaller cut.
Shifting Sentiment Among Fed Officials
Recent statements from Federal Reserve officials suggest a shift toward a more dovish stance. Raphael Bostic, President of the Federal Reserve Bank of Atlanta, recently signaled a balanced approach between managing inflation and maintaining employment.
This is a change from his earlier focus on price stability since inflation spiked in 2021. Bostic’s comments on September 4 show a growing comfort with easing monetary policy as the labor market cools.
What to Expect from the September Meeting
While the Fed is expected to cut rates in September, the size of the cut is uncertain and will depend on upcoming economic data. The employment report on September 6 and the inflation report on September 11 will be key.
These reports will likely shape the decision for a 0.25% or 0.5% cut. Investors and market watchers should stay alert, as these outcomes will influence the FOMC meeting.
The Fed’s decision will impact borrowing costs, including mortgage rates, credit card rates, and financial markets.
A deeper cut could provide more relief to borrowers but may also raise concerns about economic growth. A smaller cut could reflect caution, balancing the need to boost the economy while managing inflation.
For now, attention remains on the data ahead and the Fed’s September decision, which could set the tone for the rest of the year.
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