Some hopes fading for September Fed rate cut

While all but one of the 49 economists surveyed by Wolters Kluwer this month expect the Federal Open Market Committee to cut short-term rates this year, they are more pessimistic than in June about when that first cut will occur.

None now expect the first cut to occur at the July meeting, versus 9% of respondents in the June Blue Chip Economic Indicators survey.

In the most recent poll, 55% believe the FOMC will act in September, down from 64% in the June survey.

The meeting after that, in November was cited by 23% in the July survey, while December was the choice of 20%. This compared with 11% and 14% respectively in the June survey.

The survey took place on July 3 and 5.

At one point before the start of 2024, many observers were expecting the FOMC to make six cuts this year, but as inflation remained stubbornly higher than forecast, those views diminished to a single or even in some minds no cuts this year.

But the tide has turned in recent weeks, with the most recent Consumer Price Index report being the catalyst for more optimistic views.

While mortgages are priced in large part off of longer-term instruments such as the 10-year Treasury, that is an investor driven rate based on things like their views on the U.S. economy.

When asked in the July survey if they believed the U.S. presidential election will affect when the FOMC will act, 77% said no.

"The BCEI consensus appears to be leaning toward two 25 basis point cuts this year as it expects that the fed funds rate will decrease 45 basis points by year end," the survey report said. "This is in general agreement with the fed funds futures market which is currently pricing in the first cut in September with a second 25 basis point cut likely in December."

But another market observer had a different view on when the Fed could act.

Sticky inflation data will keep the Fed in a wait-and-see mode, a commentary from Osterweis Strategic Income Fund's Carl Kaufman, Bradley Kane, Craig Manchuck and John Sheehan said.

When the FOMC finally decides to cut, history suggests it will likely act too late, not too early, Osterweis said. It does not give a prediction on when a cut will take place.

This commentary cites the May CPI report, rather than the June report that helped drive down the 10-year Treasury yield on July 11.

On that day, the 10-year closed at 4.19%, 9 basis points from the previous close. While bouncing back up to 4.23% on July 15, it was back down to 4.17% two days later.

The May CPI data meant "the Fed will need to see at least several consecutive months of favorable inflation data before it lowers its benchmark rate," the Osterweis analysts said. "Despite the progress on the month-over-month change, the year-over-year change remained stubbornly above the Fed's 2% target at 3.3%."

The comments were made in its Third Quarter Strategic Income Outlook published on July 11.