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What's Next For The Federal Reserve As Expectations For Interest Rate Cuts Mount?

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A bevy of tamer-than-expected inflation numbers over the past week has supercharged expectations that a Federal Reserve rate cut is ahead, but Fed officials themselves are proceeding with caution.

Consumer and wholesale inflation both came in lower than economists expected and the labor market is showing signs of rebalancing. However, the Fed held its influential fed funds rates at a 23-year high for the seventh consecutive meeting earlier this week and downshifted its median expectations for rate cuts. These now narrowly predict just one rate cut this year, as opposed to the three expected in their last projections.

Forecasters think the earliest the Fed might cut interest rates is in September, and that's only if data continues to show a softening economy.

Traders have upped their expectations of a rate cut, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. Last week, traders were pricing in a nearly 50-50 chance that the Fed would cut interest rates in its September meeting. Now, that number sits at about 70%.

Investors also have high hopes for impending rate cuts. The S&P 500 hit new highs in the wake of the inflation report and Fed meeting.

However, a September rate cut isn't set in stone. Economists say this week's data has kept hopes of a September rate cut alive, but economic data will be vital to the timing.

In his press conference following the policy meeting this week, Federal Reserve Chair Jerome Powell refused to give a specific timeline for rate cuts and continued to insist upon a data-driven approach.

"We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%. So far this year, the data have not given us that greater confidence," he said. "In considering any adjustments to the target range for the federal funds rate, the committee will carefully assess incoming data, the evolving outlook, and the balance of risks."

For their part, other Federal Reserve officials have stuck to the same line in public appearances.

Cleveland Federal Reserve Bank President Loretta Mester and her counterpart in Chicago, Austan Goolsebee, were the first two Fed officials to speak on monetary policy after the June meeting. Both reiterated the need for more confidence and said they would be looking for data to provide it.

“If I continue to see some of these better inflation reports than we got earlier in the year, then I feel comfortable starting the process of normalizing rates,” Mester said in an interview with Bloomberg TV Friday.

Economists think there is plenty of time and data that could help the Federal Reserve committee members regain that confidence before September.

"The confidence lost in Q1 is now being rebuilt; rate cuts are still coming," wrote BMO's Deputy Chief Economist Michael Gregory.

Between now and the September meeting, there are three consumer and producer price index releases each. The Fed's preferred measure of inflation, the personal consumption expenditures (PCE) price index, also will have three more iterations.

Three reports on the state of the labor market and new information on gross domestic product (GDP) in the second quarter will give further insight into how the economy is digesting the still-restrictive policy. The Fed will check in on progress at their July 30 meeting before having to make a decision for September.

"There is no pre-set policy path," wrote Wells Fargo economists this week. "The strong economy continues to give the Fed cover to take its time in seeing sustained inflation progress before easing policy."

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Who is especially vulnerable during hot weather?

High temperatures can affect anyone. But some people — children, outdoor workers, people who are pregnant or have health problems or disabilities, and older people — are more likely to experience harm when temperatures rise. For example:

Young children, especially babies, have less physical capacity to deal with very high temperatures.

People working outdoors may not have access to shade and could be performing physically intensive labor. They need adequate hydration, adequate breaks, and access to a cool space during break time, as OSHA guidelines spell out.

People with chronic medical conditions, such as kidney disease or heart disease, may have difficulty adapting physiologically to hot weather, or may be more susceptible to its health impacts.

And some people living with disabilities or certain neurological conditions may have difficulty with thermoregulation — that is, controlling the temperature of their bodies — or may not be able to take actions that keep them safe, such as taking off layers or moving to a cool area.

Which weather patterns create dangerous levels of heat?

Dangerous heat is the result of both high temperatures and high humidity, which interfere with our ability to cool off by sweating. In dry areas, extremely hot temperatures can be dangerous on their own.

Danger zones vary across the United States and around the world. But hospital use and deaths rise once we get above threshold temperatures. The threshold varies in different places depending on whether bodies, cultures, and architecture are adapted to heat.

For example, here in New England, where some people (particularly those of limited means) may not have access to air conditioning, we see increases in healthcare use and deaths at a lower temperature than in the American South, where people and organizations may be more used to dealing with hot weather.

When does hot weather become dangerous to our health?

Risk goes up the longer hot weather sticks around.

One hot day can put some people at risk. A stretch of several hot days in a row during a heat wave is particularly dangerous because it can overwhelm people's ability to adapt. Eventually people run out of physiological reserves, leading to greater health harms and greater need for medical care.

Surprisingly, spring and early summer are particularly dangerous times because people and organizations aren't as prepared for hot weather.

How to create your personal heat safety plan

Five key points to help you create a personal heat plan are below. Americares offers further information through heat tip sheets developed with the Harvard C-CHANGE team that are tailored to people in different health circumstances.

Planning is important because intense heat is occurring more often: a Climate Central analysis found 21 additional risky heat days, on average, for 232 out of 249 locations between 1970 and 2022.

Stay ahead of hot weather. Check apps, websites, TV, or radio for updates on weather today and in coming days. If local weather alerts are available by phone or text, sign up.

Have a cooling plan. When temperatures soar, you need to spend as much time as possible in cool spaces. Plan options if your home is likely to be too hot and unsafe to stay in. You may be able to stay with a neighbor or family member who has air conditioning until a heat wave passes. Many cities and towns have neighborhood splash pads for children, and open cooling centers or air-conditioned libraries, public buildings, or community centers to everyone — sometimes even overnight. Spending time in air-conditioned businesses or malls, or in a shady green space like a park, may help too.

Sip plenty of fluids. Water is the best choice. Skip sugary drinks and avoid caffeine or alcohol.

Use fans correctly. Fans help if surrounding air is relatively cool. If air temperatures are very high, it's important to dampen your clothes or skin to help keep your body from overheating, and move to a cooler location, if possible.

Know your personal risks and the signs of heat-related illness. If you have health problems or disabilities, or take certain medicines such as diuretics, talk to your doctor about the best ways for you to cope with heat. It's also essential to know the signs of heat-related illnesses, which range from heat rash and sunburn to heat cramps, heat exhaustion, and heat stroke. This chart from the Centers for Disease Control and Prevention describes the signs to look for and what you can do, particularly when heat becomes an emergency.

Source: Harvard Health Publishing

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Who is especially vulnerable during hot weather?

Which weather patterns create dangerous levels of heat?

When does hot weather become dangerous to our health?

How to create your personal heat safety plan