What big moves did the Federal Reserve make in the July meeting, and when will rate cuts actually happen?
At 2 AM today, the Federal Reserve released the "report card" from the July meeting, and the results are quite simple: no rate hike and no rate cut, maintaining the current interest rate.
[Full Moon R] But behind this "no change," there's a significant shift—during the vote, 9 out of 11 members supported "no change," but 2 voted directly against it. These two are not minor figures: one is Christopher Waller, who is rumored to potentially succeed Powell, and the other is Michelle Bowman, the vice chair of financial supervision at the Federal Reserve nominated by Trump.
[Explosion R] Even more explosive is that this is the first time since 1993 that the Federal Reserve has seen "2 dissenting votes." In the past, even if there were disagreements, there was at most 1 person singing a different tune, but this time directly two people stood firm against it, indicating that the Federal Reserve has become quite argumentative internally, and the rifts are almost laid bare. Why do these two insist on rate cuts while others stick to "no change"? The core reason lies in the meeting's "soul conclusion": the top priority for the U.S. economy now isn't unemployment, but rather "things are getting more expensive"—in other words, the risk of inflation has now surpassed the risk of unemployment.
[Black Sweet Potato Question Mark R] What does it mean? The Federal Reserve has a "red line" in mind: the long-term inflation rate must stabilize at 2% to be considered normal. But what about now? Over the past year, inflation has exceeded 0.8%-1.3% every month, especially in June and July, when the increase was even more intense. In simple terms, the speed at which prices rise for things like coffee or clothing is much faster than what the Federal Reserve can accept.
[Raise Hand R] Some may ask: With high inflation, can't rate cuts help alleviate it? This brings us to the differences in the "rate cut thinking" between Trump and Powell. Trump's desire to cut rates is based on a simple logic: lower rates make it cheaper for companies to borrow money, more cash in people's hands encourages consumption and investment, which can boost the stock market and strengthen exports (a weaker dollar makes it cheaper for foreigners to buy American goods), and it can even help the government pay off less debt—according to his thinking, cutting by 2 percentage points each year could save $600 billion in interest. In short, it’s like "directly pouring money" into the economy.
[doge] However, Powell's team is now more cautious. They feel that the U.S. economy isn't at a point where rate cuts are absolutely necessary. Look at the data: the unemployment rate is only 4.5% (very low), wages are rising over 4% monthly, and hard indicators like consumption and business investment show the economy is still growing at a rate of 1.5%-2%. If they cut rates now, it could overstimulate the economy, potentially causing inflation to surge even more, which would increase the pressure on the government to pay interest as bond yields rise.
That's why economists from ANZ say that Powell probably thinks there's a high probability of rate cuts this year, but when exactly? Who knows, it depends on the data.
[Magnifying Glass R] To summarize: Currently, the Federal Reserve is in a heated debate between the "hawks" (who want to maintain interest rates to control inflation) and the "doves" (who want to cut rates to stimulate the economy), while inflation is still exceeding standards, and economic data isn't too bad, leading to an "awkward period". As for when exactly rate cuts will happen,