Investors look to the Fed for clues about a September rate cut

The Federal Reserve is widely expected to hold interest rates steady at the conclusion of its policy meeting Wednesday while opening the door to a September cut if inflation continues to show progress.

Investors will be watching for clues about the path forward in a post-meeting statement from Fed officials and a 2:30 pm ET press conference with Fed Chair Jay Powell.

The Fed could make some changes to its policy statement touting more progress toward the central bank's 2% inflation goal. it could also acknowledge a recent cooling in the job market.

Powell could also decide at his press conference to provide a stronger signal about monetary policy, perhaps even reinforcing market expectations of a likely cut at the Fed's next meeting on September 17-18.

"We think Chair Powell will offer that the latest inflation readings add to the Fed’s confidence that inflation will head towards the 2% inflation target," said Morgan Stanley chief economist Ellen Zetner.

At the same time, "we think he will again note that the labor market is in better balance," she added.

Some key Fed officials have been emphasizing in the weeks leading up to Wednesday's meeting that they are getting closer to having confidence inflation is sustainably dropping to their 2% goal.

They have also made it clear they are paying more attention to rising unemployment, another sign that cuts may be nearing.

Most Fed watchers say the central bank still needs just a bit more time to be sure, while also preparing the markets for the significant action to come.

The latest reassurance that a cut could be nearing came Friday when a new reading of the Fed’s preferred inflation gauge — the core Personal Consumption Expenditures (PCE) index — showed its lowest annual gain in more than three years.

The 2.6% annual increase in the month of June was the same level as May and down from 2.8% in April. On a three-month annualized rate, core PCE dropped back to 2.3% from 2.9%.

Another inflation measure, the Consumer Price Index (CPI), has also shown progress.

On a "core" basis — which excludes volatile food and energy prices the Fed can’t control — CPI rose 3.3% year over year in the month of June. That was down from 3.4% in May and 3.6% in April.

Some Fed watchers do argue the Fed has the basis to support a cut at its meeting this week, even as they note they don’t expect it to happen.

"I don't see a reason within the economic data that they should not cut this meeting," said Wilmington Trust chief economist Luke Tilley. "In fact, I think it's hard to see a reason that they should keep rates where they are."

That said, there’s "no way" the Fed would do that, Tilley added, because it runs the risk of "spooking the markets."

He predicts one cut in September and another in December, followed by a total of six quarter-point cuts in 2025.

The last median estimate from the 19 Fed officials who have a voice in the direction of rates was for one rate cut this year, a prediction made in early June.

But that was likely influenced by hotter-than-expected inflation data in the first quarter. Now that inflation is cooling again, officials may be more open to two cuts before 2024 is over.

The Fed will announce its policy decision Wednesday at 2 pm ET, followed by Chair Powell’s press conference at 2:30 pm ET.