In that July meeting, the Fed held rates unchanged in that meeting for the twelfth consecutive month.
But in the press conference, Jerome Powell made a good case (as he has in the past) for why they should have cut, which includes this very significant statement:
"The job is not done on inflation, but nonetheless we can afford to begin to dial back restriction in our policy rate."
He also admitted that they have "a lot of room to respond" to a shock or weakness in the economy (i.e. plenty of rate cut ammunition, given the high level of the policy rate).
Now, heading into that meeting the market was pricing in a coin flips chance between 50 and 75 basis points of cuts by year end.
We've since seen what should meet the Fed's definition of "cracks" in the job market, which has been their stated condition to "react" (in Jerome Powell's words) with a policy response.
With that, heading into tomorrow's speech, the market is now pricing in the likelihood of 100 basis points of cuts by year end — with a small chance of as many as 150 basis points.
So, just in a few weeks, the pendulum has swung back in the direction of aggressive rate cuts by year end.
That said, these expectations assume the Fed will indeed react to "cracks," which implies that they will take the signal of weakness in the labor market to proactively stop a deepening of the crack that would lead to more significant economic damage (like sharper job losses, declines in consumer spending, cutbacks on investment, etc.).
The problem: History suggests the Fed is more comfortable doing clean up and rescue, than proactive fine tuning.
This is why, during their respective tenures as Fed Chair, both Bernanke and Yellen said that economic expansions don't die of old age (historically), the Fed tends to murder them.
