How the Fed Can Cut Rates This Summer Without Cutting Rates
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The Federal Reserve has more than one way to work its will on the economy. It could soon start using its more subtle tools to start nudging rates down. That still would have a real impact on businesses and households.

The central bank most directly controls short-term rates by setting a target range for the federal-funds rate, the rate at which banks lend money to one another overnight. On Wednesday it left this target unchanged while saying that Fed policymakers on average expect to cut this rate range just once this year, down from an expectation of three times in March.

But there are a plethora of other rates that economic players charge each other across the economy, all of which can be indirectly influenced by expectations for what the Fed is likely to do, both in the near term and further out. The Fed can, and frequently does, sway these rates by communicating its future intentions, even without taking action on the fed-funds rate.

This process has in some sense already begun. Following some weak economic data over the past few weeks—with the notable exception of Friday’s strong jobs report—the yield on U.S. 10-year Treasury notes moved from 4.7% in late April to 4.25% just before the Fed’s initial statement at 2 p.m. on Wednesday. It ticked back up to 4.33% late Wednesday after the release of the Fed’s projections suggesting just one cut this year, then fell back to around 4.27% on Thursday morning after a weak producer-price reading.

This rate has a strong influence on loans made over the longer term, such as mortgages or loans to property developers for major projects. When it moves, it can have an immediate impact on conditions for borrowers in the real economy.

Importantly, Fed policymaker outlooks for future rate cuts were formulated before the release of Wednesday morning’s surprisingly cool consumer-price-index report for the month of May, though they did have an opportunity to revise those outlooks after the reading came out. This data reinforced evidence that inflation is steadily heading down despite plateauing in the early part of this year. The year-over-year change in core CPI excluding food and energy has now been flat or lower for 15 consecutive months.

“The rate path looks a bit inertial and stale,” wrote Evercore ISI’s Krishna Guha of the Fed’s projections in a note, with policymakers disinclined to change their expectations “on the basis of one late-breaking CPI print.”

“We’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%,” Fed Chair Jerome Powell said at Wednesday’s press conference. More such good data could well be coming in the next two monthly CPI reports, prompting the Fed to start communicating an openness to cutting rates.

The current debate among economists and investors is whether the Fed will make its first move in September or later—perhaps December. But it will have plenty of opportunities between now and then to make its intentions more clear.

Most notably there is the next policy-setting meeting that will conclude on July 31. There won’t be an update to forward rate expectations, but there will be a statement from the Fed describing its view of recent economic conditions, and of course another Powell press conference. Both of these could be used to articulate increasing confidence that inflation is softening.

And although there is no meeting in August, there will be the closely watched Jackson Hole Economic Policy Symposium, where Fed policymakers gather with leading economists and others to discuss the state of monetary policy and the global economy. Fed chairs have historically used addresses at this forum to signal big shifts in the Fed’s plans or thinking.

The reality, at least since the tenure of Fed Chair Ben Bernanke, is that by the time Fed policy changes actually arrive they are often almost a formality, with the groundwork having been laid long before. This time will likely be no different.