Krishna Guha on Fed's 'Wait and See Mode' and September Rate Cut Expectations

Federal Reserve's Current Stance

• 🎯 The Federal Reserve is expected to remain in a 'wait and see mode' during today's meeting.
• 💡 Recent May data, including solid labor market gains and a surprisingly good inflation report, is reassuring but not enough to warrant immediate action.
• ⚠️ Softness in housing starts and retail sales indicates a need for more information before making decisions.

Outlook for September Rate Decisions

• 🗓️ The Fed's primary focus is on gathering more data throughout June, July, and August to inform a 'go or no-go' decision for September.
• 📊 The baseline expectation among key Fed leadership is for two rate cuts, though some individual policymakers might lean towards one.
• ⚖️ A close division among Fed officials on the number of cuts highlights the data-dependent nature of future policy.

Potential Impact of Future Fed Leadership

• 🔮 Market participants are considering a shift towards a more dovish stance after Chair Powell's term expires in May 2026.
• 📈 However, the market itself will likely impose constraints, potentially leading to higher long-term yields if interest rates are cut prematurely without considering inflation pressures.
• 📉 Excessive rate cuts could erode Fed independence and increase inflation expectations, leading to upward pressure on yields.

Risk Management and Rate Cut Timing

• ⚠️ The Fed acknowledges risks on both sides: downside risks to growth and unemployment, and upside risks to inflation, particularly from tariffs.
• ⚖️ The Fed's strategy involves two-sided risk management, necessitating a hold for now to gather more information.
• 💡 A slim probability suggests that by September, enough labor market weakening will occur for the Fed to cut rates and lean against economic weakening.