Federal Reserve Board member Betsy Musalem threw a small bucket of cold water on the market's rate-cut fever yesterday, emphasizing that the central bank isn't quite ready to commit to easing monetary policy next month.
"We need to see more data," she said during remarks at an economic forum in Chicago. Plain and simple.
Markets have been acting like rate cuts are basically a foregone conclusion. They're not, apparently.
Look, I've covered the Fed long enough to recognize when officials are trying to rein in market expectations that have gotten ahead of themselves. This was textbook Fed pushback — not slamming the door on September action, but definitely wiggling the doorknob to make sure everyone knows it could still be locked.
Musalem's comments came just a day after several economic reports showed inflation continuing its gradual descent toward the Fed's 2% target. Good news, sure, but not enough to seal the deal.
"The data has been encouraging," she acknowledged, before adding the quintessential Fed qualifier: "but we need to see more consistency before making any policy adjustments."
Translation: Don't put all your chips on September just yet, folks.
What's fascinating about this moment in monetary policy (if you're the type who finds monetary policy fascinating — and I confess I am) is that the Fed finds itself in an unusual position. They're not contemplating rate cuts because the economy is tanking. It's not. They're considering cuts because inflation has cooled enough that keeping rates this high might not be necessary anymore.
It's like easing your foot off the brake rather than slamming on the gas — a subtle but crucial distinction.
The markets, meanwhile, have been pricing in rate cuts with all the restraint of a toddler who's spotted the cookie jar. As of yesterday, futures markets were implying a 74% chance of a September cut. After Musalem's comments? Still around 70%.
I spoke with several traders afterward who basically shrugged off her caution. "They always say this stuff before they cut," one bond trader told me. "It's just part of the dance."
Maybe so. But having attended more FOMC press conferences than I care to remember, I'd suggest not underestimating the Fed's willingness to disappoint markets when they feel expectations have become unmoored.
The political context here matters too. With the presidential election now less than three months away, every Fed decision gets scrutinized for political motivations — something the fiercely independent central bank absolutely loathes. Cut rates in September, and half the country thinks you're trying to juice the economy for the incumbent. Wait until November, and the other half thinks you were playing politics by holding off.
No wonder Musalem and her colleagues sound so cautious! They're walking a tightrope in a hurricane.
The economic data itself remains... complicated. Inflation? Coming down, but still above target. Employment? Still strong, though showing signs of cooling. Growth? Moderate but positive.
"We're in a good place," Musalem said, in what might be the understatement of the year. The Fed has raised rates to a 23-year high without triggering a recession — so far, anyway. That's no small feat.
So what happens next? (I ask, knowing full well that economic predictions are worth about as much as a subprime mortgage circa 2008.)
We'll get another inflation report before the September meeting. We'll get another jobs report too. And we'll get approximately 4,721 more Fed speeches parsing every decimal point of data.
In the meantime, markets will do what markets do — react, overreact, and then react to their overreactions.
As one veteran Fed watcher put it to me after Musalem's speech: "They're not saying no to September. They're just saying 'convince me.'"
Fair enough. After fifteen rate hikes, a little convincing seems reasonable before they change direction.
