Hope of multiple unrest rate cuts in 2025 is back. Today, June 24, money markets were again pricing in two Fed reductions by the end of the year and giving a 25% chance to a third cut.
The reason for the return of rate cut optimism?
A second Federal Reserve official, Michelle Bowman, the Fed’s vice chair for supervision, said on Monday that with inflation cooling and the labor market showing signs of weakness, “it is time to consider adjusting” interest rates to avoid putting too much downward pressure on economic growth.”
The Fed’s rate-setting body, the Federal Open Market Committee, next meets on July 30.
“Should inflation pressures remain contained,” Bowman said in a speech in Prague, “I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market.”
Bowman’s remarks followed similar comments from Fed governor Christopher Waller in a Friday interview with CNBC that policymakers should not wait for the labor market to weaken before lowering borrowing costs.
The financial markets are interpreting these comments to mean that there’s increasing disagreement at the Fed with Jerome Powell, the Fed chair, who last week stressed that the central bank could remain patient as it waited to see the impact of Trump’s tariffs. “Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs,” Powell said in his news conference after the Fed meeting.
Bowman and Waller joined Mr. Powell and other officials in voting to hold interest rates steady at the June 18 Fed meeting. But in their recent comments, they said they did not expect tariffs to have a significant impact on inflation.
For all those trying to predict which way the Fed will jump and when, I would note that the July meeting does not include a quarterly update on the Dot Plot forecasts for inflation and economic growth for the year ahead. The Fed does “like” to announce major policy decisions at the same time as it revises its forecasts.
