Flashlight for the september FOMC blackout: Cuts to begin again

Summary

• We expect the FOMC to resume lowering the fed funds rate at its September meeting with a 25 bps rate cut that would bring the policy rate to a range of 4.00%-4.25%.

• A more precarious picture of the labor market has become apparent since the FOMC last met in July. The three-month average pace of payroll gains is now reported at just 29K compared to 150K when the FOMC gathered in July. Furthermore, the unemployment rate has moved up to a cycle-high of 4.3%, putting it at the top end of the FOMC’s range consistent with “full employment.”

• Additional policy easing this year has been delayed due to inflation. Reflation in the goods sector alongside slower services disinflation has kept core PCE running about one percentage point above the 2% target. That said, the outlook for inflation has been little changed over the past six weeks. Our own forecast looks for core PCE to rise 3.1% on a Q4/Q4 basis this year, the same as before the July FOMC meeting.

• We think the meeting statement will mark down the FOMC's current view of the labor market but refrain from signaling that additional rate cuts will immediately follow September’s cut. This would give the FOMC the flexibility to reduce the policy rate again at its next meeting on October 29 or proceed with additional easing more slowly.

• We expect the updated dot plot to signal more easing through the remainder of this year and next (Table). The composition of the Committee looks set to tilt in a more dovish direction with Stephan Miran on track to be confirmed prior to the meeting. However, the more significant driver of the revision, in our view, is the combination of increased risk to full employment and the generally stable inflation outlook. We think the median dot for 2025 will move down to project 75 bps of cuts compared to 50 bps of cuts in June. For 2026, we anticipate the median dot will fall 50 bps from the June SEP projection of 3.625% to 3.125%, implying an additional 25 bps cut next year. We do not expect any changes to the median longer-run estimate.

• Our base case forecast for the federal funds rate is three 25 bps rate cuts at the three remaining FOMC meetings of the year, followed by two 25 bps rate cuts at the March and June FOMC meetings before a prolonged hold at 3.00%-3.25%. For further reading on our fed funds projections and broader economic outlook, see our recently released monthly economic outlook.

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