The FOMC’s next scheduled meeting is September 20. They are slated to have critical conversations with each other about the state of our economic data and the impact of tariffs. These decisions could have a big impact on how markets react to the ongoing government shutdown and debt ceiling negotiations over the next few weeks. FOMC members will be reading with keen interest all the new data on US inflation and labor market conditions. They interpret these factors in the context of existing tariff omens to guide their approach to monetary policy.
As FOMC officials analyze the latest economic indicators, they will likely focus on two primary factors: the actual economic data available and the expected ramifications of tariffs on future economic performance. Recent reports indicating a moderated inflation rate and stability in the job market may lead some officials to advocate for a more accommodative monetary policy. This reading fits nicely with the interpretation that the economy is maybe deserving of at least a few less aggressive rate hikes.
It seems that the bigger picture is not seen by all of the officials. Yet now a few FOMC members are signaling a less aggressive stance. As a result, they’re looking for fewer rate cuts this year than they had been just days ago. While that would still be a cut in 2025, the change in sentiment is enough to lead to only one 25 bps more modest cut. This is a significant move away from what the committee had previously estimated.
The impacts of these conversations go far beyond the policy changes of the moment. Market analysts predict that a hawkish tone emerging from the dot plot—an illustration of individual FOMC members’ interest rate projections—could bolster the dollar’s strength in the latter half of the week. In particular, if FOMC officials communicate a lack of urgency to lower rates, this could further enhance the dollar’s position in global markets. A stronger dollar is almost always seen as bullish—an indication that investors are confident in the US economic recovery.
As of writing, futures markets are pricing in expectations for two 25 bps cuts before year-end. This expectation is consistent with previous public comments by FOMC members as early as March. They were betting on an economic more than two rate cuts worth for the remainder of 2023. The market’s response on Wednesday will depend on how strongly FOMC officials communicate their convictions about the future direction of monetary policy.
The relationship between trade war nuances and economic data continues to dominate FOMC conversations. Today the United States is dealing with inflationary pressures and erratic employment numbers. Our officials should take a hard look at what these factors mean for today’s misguided trade policies. The results of these deliberations will not only dictate new near-term policy but will set expectations for investors in the longer term.