Federal Reserve officials are widely expected to leave their key interest rate unchanged on Wednesday, keeping it at the two-decade high of 5.3 percent for a 12th straight month in a bid to slow economic growth and crush inflation.
But investors will be most focused on what comes next for borrowing costs. Economists and traders widely expect Fed officials to cut their policy rate at their next meeting, in September. Wall Street will closely watch for any hints about the future in both the Fed’s statement at 2 p.m. and a subsequent news conference with Jerome H. Powell, the chair of the central bank.
While few economists expect an explicit signal on when a rate reduction is coming — the Fed has been trying to keep its options open — many think that central bankers will at least leave the door open to a cut at the next meeting, which will wrap up on Sept. 18. And Mr. Powell is sure to face questions about how officials are thinking about the potential for moves after that. Here’s what to look out for.
Watch the Fed’s statement for changes.
The Fed’s statement, a slowly changing document that officials release after each two-day meeting, currently states that Fed policymakers expect to hold rates steady until they have “gained greater confidence that inflation is moving sustainably” down.
Michael Feroli, chief U.S. economist at J.P. Morgan, wrote in his preview note that the statement could be headed for a small but meaningful tweak: Officials could adjust “greater confidence” to read “further confidence,” or some similar rewording. That would signal that policymakers were becoming more comfortable with the inflation backdrop.
There would be a reason for that growing confidence. After proving surprisingly stubborn early in 2024, inflation is cooling again. The latest report showed that the Fed’s preferred index picked up just 2.5 percent over the year through June — still quicker than the central bank’s 2 percent target, but much slower than that measure’s recent peak in 2022, which was above 7 percent.
While the Fed releases economic projections once a quarter to show how officials expect inflation and rates to shape up, this is not a meeting with those forecasts. The next set will come in September.
That will leave investors reliant on the statement and Mr. Powell’s news conference as they try to understand the Fed’s path ahead.
The Fed chair could give hints about the outlook.
Many economists predict that Mr. Powell is likely to avoid committing the Fed to anything concrete, even though market pricing has coalesced around a rate move in September. Some investors are even betting on a large cut of half a percentage point, rather than the standard quarter point.
“The market might be disappointed if it’s expecting that Powell will commit to a cut in September,” said Oscar Munoz, chief U.S. macro strategist at TD Securities. “They’re almost there — but they want to see a few more data releases.”
Mr. Munoz said the only reason the Fed would make a big reduction in September would be if the labor market took a sudden and unexpected turn for the worse.
Rate-cut timing hinges on incoming data.
To that point, when and how much the Fed cuts this year are likely to hinge on two sets of incoming data: what happens next with inflation and what happens next with the job market.
When it comes to inflation, some economists think that it would take only a little bit more evidence of progress on the two main measures — the Consumer Price Index and Personal Consumption Expenditures index — to push the Fed toward a rate move.
“We suspect that an acceptable July C.P.I. report would likely be enough to clinch a September cut,” economists at Goldman Sachs wrote in their note previewing the Fed meeting.
But Fed officials have been clear that they are also paying close attention to what is happening in the job market. If conditions sour, that may add to their urgency in cutting rates. Policymakers will receive two fresh jobs reports before their September meeting, with the July numbers coming on Friday.
“They don’t want to take the strength of the labor market for granted,” said Karen Dynan, a Harvard professor and former Treasury chief economist during the Obama administration.
Another big question: How fast will rates come down?
Both the labor market and inflation data are likely to inform how fast rates fall over the next few years. While the first cut is in focus at the moment, investors are also beginning to wonder what will come after it.
As of their June economic projections, Fed forecasts implied that central bankers could cut roughly every other meeting once they got started. That would lower rates to 4.1 percent by the end of next year and 3.1 percent by the end of 2026.
Whether that anticipated pace turns out to be the case “will likely depend mainly on the labor market, which has sent mixed signals lately,” and on government taxing and spending policy after the presidential election in November, Goldman Sachs economists wrote in their preview note. Hotter economic conditions would slow the Fed’s cuts down, while a more pronounced cooling could speed them up.
Mr. Powell could face questions about how the Fed is thinking about pacing after an initial move at his news conference this week. So far, officials have been more focused on explaining what it would take for them to begin lowering borrowing costs in the first place.
“They know that the first cut will be important — it will signal the start of an easing cycle,” Mr. Munoz of TD Securities said.