Fed unlikely to cut rates next week, but may send clear signal on September cut

Investing.com -- The Federal Reserve's meeting next week is expected to come to soon for rate cuts, but central bank will likely take the opportunity to set the stage for a September rate cut following more progress on inflation.

"We expect the FOMC to leave the fed funds rate unchanged next week, but for the communication to foreshadow rate cuts ahead," Macquarie said in a Friday note, forecasting 75 basis points of cuts this year, with the first cut in September.

Recent data showing slowing in the labor market and cooling inflation have put a September rate cut in the driving seat.

The core PCE price index, theFederal Reserve's preferred inflation gauge, rose 0.2% in June and 2.6% in the 12 months through June, compared with estimates for 0.2% and 2.5%, respectively.

This data will likely be reflected not only in the monetary policy that will follow the Fed's interest decision on Jul. 31, but also in remarks from Jerome Powell at the press conference.

"Chair Powell is likely to stress these points in his press conference, while also re-iterating that the Fed remains data dependent," Macquarie added.

While inflation has been the key focus for the Fed since its rate-hiking cycle got underway more than two years, Macquarie has believes Powell's remarks around the weakening in the labor market will be key.

To the extent Powell places more "emphasis on this side of the mandate (rather than solely inflation), it could fuel hopes for rate cuts and market risk appetite," Macquarie says, highlighting the most recent monthly nonfarm payrolls report showing unemployment rate rose to 4.1%.

This uptick in unemployment to 4.1% is important because it is above the Fed's projection of 4% by year end that was released at the June meeting in its summary of economic projections.

In recent weeks, the Fed has faced mounting calls to ditch its higher for longer stance or risk missing the soft landing.

"A soft landing for the US economy could too easily slip away if unhelpful, noisy data delay an interest rate cut beyond September," Mohamed A. El-Erian wrote in a recent Bloomberg opinion piece.

El Erian's warning for the Fed comes amid worries that the Fed's data dependent approach risks the central bank cutting rates too late should inflation in the coming months surprise to the upside.