Chips and Energy

The deputy manager turned first to an overview of financial market developments during the intermeeting period. Markets appeared to interpret data releases and FOMC communications as indicating that the baseline outlook was little changed but that downside risks to the labor market had increased. Median modal expectations for personal consumption expenditures (PCE) inflation this year and next from the Open Market Desk's Survey of Market Expectations (Desk survey) increased only slightly, and expectations for the unemployment rate increased only marginally overall. However, after the weaker-than-expected July and August employment reports, investors' focus shifted to downside risks to the labor market. Near-term expectations for the policy rate had moved lower in response to weaker-than-expected employment data and the apparent rise in downside employment risks. Almost all respondents to the Desk survey expected a 25 basis point cut in the target range for the federal funds rate at this meeting, and around half expected an additional cut at the October meeting. The vast majority of survey respondents expected at least two 25 basis point cuts by year-end, with around half expecting three cuts over that time. Respondents' expectations for 2027 and beyond were unchanged, implying that revisions to respondents' near-term expectations reflected an anticipation of a faster return of the federal funds rate to its longer-run level than previously expected. Market-based measures of policy rate expectations were broadly consistent with responses to the Desk survey, reflecting about three 25 basis point cuts by the end of the year. The deputy manager then discussed developments in Treasury markets and market-based measures of inflation compensation. Nominal Treasury yields fell 20 to 40 basis points over the intermeeting period, with the largest decline occurring at the short end of the yield curve; the curve therefore steepened. Staff models indicated that nearly all the decline in short-term rates was attributable to the shift down in policy rate expectations. *FED: A FEW OFFICIALS COULD HAVE SUPPORTED NO RATE CUT IN SEPT. *FED: MOST SAID LIKELY APPROPRIATE TO EASE POLICY MORE THIS YR *FED: MAJORITY EMPHASIZED UPSIDE RISKS TO INFLATION OUTLOOK Fed: A few participants noted the standing repo facility would help keep the fed funds rate in target range and ensure money market pressures would not disrupt ongoing quantitative tightening.