Anticipating Powell's Address: Will He Signal Imminent Rate Cuts?

While investors will scrutinize Powell's remarks on Thursday, hoping to find clues that the Federal Reserve will soon cut interest rates, they may be disappointed. Policymakers are widely expected to hold interest rates steady for the fifth consecutive time at the conclusion of their July policy meeting. A dissent from one or more officials could signal that some members of the Federal Open Market Committee (FOMC) favor cutting rates sooner rather than later. However, with a significant amount of economic data due to be released before the next meeting in September, the Fed Chair is likely to keep policy options open until the economic direction and policy path become clearer. "There is no doubt that the FOMC will hold rates steady," Bank Policy Institute Chief Economist Bill Nelson, a former senior Fed economist, said in a report on Tuesday. "The question is, will they send a stronger signal that they are leaning toward a September rate cut?" U.S. President Trump continues to call for lower interest rates. Powell will also certainly be asked about the Fed's $2.5 billion office renovation project – which has become a target for Republican attacks on the central bank. The Fed will announce its interest rate decision at 2 a.m. Beijing time on Thursday, with Powell holding a press conference 30 minutes later.

September Outlook

After this week’s meeting, the Fed has just three policy meetings left this year. In June, the median forecast of Fed officials showed two rate cuts in 2025 (25 basis points each). That makes a September rate cut look very plausible, said Citigroup economist Veronica Clark. "The modal official is still in wait-and-see mode, but a September cut is very reasonable," Clark said. But how much Powell wants to push that expectation is unknown, according to Nelson of the Bank Policy Institute. Federal funds futures contract pricing shows investors believe there is already more than a 60% chance of a September rate cut. Fed officials may not want that probability to rise further before they review the pre-meeting economic data, Nelson said. Before the September meeting, policymakers will see two jobs reports (including this Friday’s July nonfarm payrolls report), as well as more inflation, consumption, and housing data. "If the committee wants to preserve optionality, it has to remain deliberately neutral and continue to emphasize data dependence," Nelson said.

Dissenting Votes

If the Fed continues to describe the labor market as "solid" in its post-meeting statement, it could trigger dissent from officials concerned about the fragility of the U.S. employment situation. Fed Governor Waller laid out his rationale for a July rate cut in a detailed speech earlier this month, voicing concern that the labor market is "on the edge" and could rapidly deteriorate if the Fed doesn't provide more support. Another Governor, Vice Chair for Supervision Bowman, has also said she is prepared to support a rate cut at this meeting. If Waller and Bowman both dissent, it would be the first time that two governors have opposed a policy decision since 1993. While it is worth watching, some Fed watchers say it is normal for disagreements to emerge among officials when policy is near an inflection point.

Tariff Impact

Powell is likely to be asked for his interpretation of the latest inflation data. The Fed Chair and other officials have indicated that they are cautious about cutting interest rates until the impact of tariffs on prices becomes clearer. Trump's Aug. 1 deadline could make the average tariff rate and economic outlook more apparent. Waller has said that he expects tariffs to lead to only a one-time increase in prices, while other officials are concerned that the impact on inflation could be more sustained. Some goods prices have risen, but many economists are puzzled about why the impact hasn’t been more pronounced. Gregory Daco, chief economist at EY-Parthenon, says this could be because companies front-loaded imports of inventory, absorbed the shock by reducing profit margins, and currently at least some other parts of the supply chain are shouldering some of the tariff costs.

Political Pressures

A number of other topics are likely to come up at the press conference, including the Fed’s renovation project, and Trump and other Republicans visiting the project last week. Powell is likely to be repeatedly asked whether political pressures are affecting officials’ ability to set policy. Powell may also have to respond to Treasury Secretary Mnuchin’s suggestion – that the Fed conduct a review of its non-monetary policy functions to address what he has called “mission creep.” “An internal review would be a good start,” Mnuchin said in a Bloomberg Television interview on July 23. “If the internal review doesn’t look serious enough, maybe there could be an external review.”