Take time. In our view, the outcome of the July FOMC should be pretty straightforward. We expect no cut and a prudent Powell. Yes, the data have moderated. And yes, markets have already priced a cut in September. But in our view there is no reason for the Chair to precommit. As previously explained, the models continue to signal that core inflation might remain a bit above target going forward. Indeed, noting dramatic as pi* is estimated at 2.47% but enough to remain prudent right now. We also think that in the statement the sentence “In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective” can be redrafted to signal some more progress. Having said that, we expect everything else to be post-poned to the Septmeber FOMC where, as flagged a couple of days ago, we expect the SEP to revert back to something close to the March SEP.
Main points:
- The incoming data have been a bit weaker than expected by the Fed staff forecast inferred from the latest FOMC minutes. We estimate that the surprise is about 2 tenths to rounding. The distribution of price changes remains consistent with readings above target.
Figure 1. Core CPI MoM prices change distributions.
- The main medium-term model forecast is little changed. The “main” model forecast (sample ends in Q2) continues to project core inflation to gradually moderate. The (Q4/Q4) model forecast is: 3.0% in 2024, 2.6% in 2025, and 2.5% in 2026. The forecast remains higher than the Fed target.
Figure 2. Current and previous FOMC round “main” model forecast of core PCE price inflation.
- The estimate of “underlying inflation” (pi*), the crucial variable in the Fed staff forecast, is a touch lower. According to our models, the Fed staff is estimating pi* at 2.47 percent. Pi* is very persistent by nature and remains above the Fed target.
Figure 3. Evolution of the estimate of pi*.
- FRB-US projects a path of the FF rate a bit more dovish than the June SEP in 2025 and 2026. According to the model, the FF rate is expected at 5.1% in 2024, 3.9% in 2025, and 2.9% in 2026.
Figure 4. Latest FRB-US forecast (red dashed line) vs latest SEP (blue solid line).
As usual, we would be more than happy to schedule a meeting to discuss the details.