• The Federal Reserve is looking for more “good inflation” data before cutting interest rates.
• Jerome Powell reiterates the data-driven approach and says decisions will be made on a meeting-by-meeting basis.
• Federal Reserve policymakers are divided on when policy will pivot.

As expected, the Federal Reserve (Fed) left its key interest rate unchanged at 5.25%-5.5% following its June policy meeting. Revised Summary of Economic Projections (SEP), the so-called scatter plot, showed that policymakers were divided on the short-term outlook for interest rates. Four of the 19 officials predicted no interest rate cuts in 2024, seven predicted a 25 basis point (bp) rate cut and eight predicted a 50 basis point cut in the policy rate.

Philadelphia Fed President Patrick Harker took a cautious stance on Monday, noting that the Fed may have to keep interest rates at current levels longer than markets currently expect.

Harker’s key comments

Monetary policy remains in restrictive territory.

Keeping rates at their current levels for a little longer will support lower inflation and mitigate upside risks.

More data is needed to make a decision on interest rate cuts given the instability so far this year.

If my economic forecast is correct, I think one rate cut would be appropriate by the end of the year.

I still forecast a slowdown, but above-trend growth, a moderate augment in the unemployment rate and a long return of inflation to 2%.

Last week’s CPI data was very welcome, but overall progress on inflation has been modest in recent months.

The long-term persistence of shelter inflation remains a problem, as does service sector inflation.

The latest inflation data is quite promising, but does not provide the required certainty and has not dispelled uncertainty.

The Fed’s comment will be key

Fed Chairman Jerome Powell refrained from hinting at the timing of an interest rate cut at his post-meeting news conference. “We need more certainty and more good inflation readings, but we won’t be specific about how many of them are going to start cutting rates,” Powell explained.

According to the CME FedWatch Tool, after the Fed event and inflation data in May, the likelihood of the Fed leaving interest rates unchanged in September dropped from 50% to 30%.

As the Fed’s lockdown period ends after the June meeting, investors will be paying close attention to comments from policymakers in the near future.

Cleveland Fed President Loretta Mester said she would like to see a “longer run of good inflation data,” and Minneapolis Fed President Neel Kashkari said over the weekend that a “reasonable forecast” would be for the Fed to wait until December to cut interest rates, adding that the central bank is in a very good position to get more data before making any decisions.