Updated baseline
We have updated the baseline. We have revised our baseline scenario to reflect new assumptions and incoming data post nonfarm payrolls. In this iteration, we incorporate Q2 GDP numbers, a revised path for core import prices (we now assume 18% average tariffs rate), updated long-term rates, and updated labor market and inflation figures. We also nowcast real GDP Q3 at 0.8% QoQ saar.
The outcomes of the revised baseline scenario are illustrated in Figure 1 and Figure 2, which display real-side and financial-side variables, respectively. In Figure 1, the red lines denote the updated forecasts generated by FRB-US, while the blue lines represent the June SEP.
Bottom Line: The path of the FF rate remain marginally more hawkish than in the June SEP, despite the latest NFP numbers. We explain why below.
In the revised baseline scenario (depicted by the red lines), projected economic growth is somewhat lower than in the June SEP, as the model incorporated signals from the below-potential readings in private domestic final purchases (PDFP). Nevertheless, the unemployment rate remains slightly lower than in the SEP projection for this year, reflecting the model’s response to the decline in labor force participation. (Technically, the June SEP-consistent dataset assumed a participation rate significantly higher than what has since been observed; a comparison is available here.)
For reference, the model now forecasts an average monthly increase in nonfarm payrolls of 46,000 in the third quarter. Simultaneously, core inflation is projected to be marginally higher, driven by an upward revision in the average tariff rate.
Figure 1. Update FRB-US forecast – real-side variables.
Note: Real GDP growth and core inflation are expressed on a year-over-year basis. Core inflation refers to core PCE price inflation. The red-dashed lines are the model forecast, while the blue dots are the latest SEP. This forecast has been updated as outlined in the text.
Figure 2. Update FRB-US forecast – financial variables.
Our comment
FRB-US is not there for a cut in September.
Powell’s recent remarks were interpreted by many of our clients as hawkish. However, we believe he was simply reflecting the projections derived from the Federal Reserve’s models. Incorporating the most recent labor market data, the overall outlook remains broadly unchanged. The federal funds rate projection remains slightly higher than in the June Summary of Economic Projections (SEP), primarily due to a decline in labor force participation, which continues to suppress the unemployment rate, alongside slightly stronger inflation readings.
Could the Fed still choose to cut rates in September? Yes, that remains a possibility. However, based on the current set of information, such a move would likely reflect a discretionary policy judgment rather than a model-driven decision. And in that case, we are not sure that the long-end of the curve would move down.
Finally, we are frequently asked: “What data trajectory would justify a September rate cut?” Our current estimate is that this would require another notably weak nonfarm payroll (NFP) report and a core CPI increase of 0.2% month-over-month (seasonally adjusted). At present, we consider this outcome to be relatively unlikely, as we anticipate stronger inflation prints in the near-term.