The Federal Reserve held interest rates steady on Wednesday, but central bank chief Jerome Powell said policymakers could cut them at their next meeting in September, with recent data strengthening his confidence that inflation is aligning with his 2% target.
Powell’s remarks at his news conference after the end of a two-day Fed meeting seemed like confirmation of a coming turn in September, which was partly reflected in the central bank’s new monetary policy statement.
“There has been some further progress toward the Committee’s 2% objective,” the central bank’s Federal Open Market Committee said in a statement, keeping its benchmark overnight interest rate in the 5.25%-5.50% range.
Powell went further, telling reporters that “there is a growing sense of confidence that action could be taken at the next meeting” provided that upcoming inflation data confirms its recent slowing trend.
The central bank uses the personal consumption expenditures price index for its 2% annual inflation target. The PCE price index rose 2.5% in June, after topping 7% in 2022, and recent monthly readings have shown it even closer to target.
Investors saw Powell’s comments as clear preparation for a cut in borrowing costs at the Fed’s meeting on September 17-18, just seven weeks before the US election on November 5.
“Listening to him talk, it’s clear that everyone is ready for the September rate cut and that they will maintain their optionality,” said Mark Malek, chief investment officer at SiebertNXT.
Interest rate futures, stocks and Treasury bonds rose sharply after Powell’s comments, so much so that the probability of a first cut in September of half a percentage point rose to about 15%, according to CME Group’s FedWatch tool.
Powell, however, said a 50-basis-point cut was not something being actively considered.
Current mandate
While Fed officials are wary of any action that might undermine their “data, not politics” approach to setting borrowing costs, the steady decline in inflation in recent months has created a broad consensus that the battle against rising prices is coming to an end.
Inflation, the Fed said, was now only “somewhat elevated,” a key downgrade from the assessment it has used throughout much of its battle against rising prices that it was “elevated.”
“We have not made any decisions on future meetings” regarding rate cuts and all decisions will be made on a meeting-by-meeting basis, Powell said at his news conference.
But he added that as Fed officials have gained confidence that price pressures are easing, “the economy is approaching the point where it will be appropriate to reduce our policy rate.”
The Fed’s statement also removed a reference to it being “closely vigilant about inflation risks,” replacing it with an acknowledgement that policymakers were now “mindful of risks to both parts of their dual mandate,” which includes Congress’s charge to maintain maximum employment consistent with stable prices.
U.S. central bankers have said it would be appropriate to cut borrowing costs before inflation actually returns to target, to take into account the time it takes for monetary policy to affect the economy.
So far, the economy “has continued to expand at a solid pace,” the Fed said in its latest statement, and while “job gains have moderated,” the unemployment rate “remains low.”
But the unemployment rate has been rising and policymakers have recently been more attentive to avoiding the kind of sharp rise in joblessness often associated with high interest rates and slowing inflation.
The Fed did not commit in its statement to a rate cut in September, repeating that policymakers still need “greater confidence that inflation is moving sustainably toward 2%” before lowering borrowing costs.
But the changes appear consistent with confidence that a September policy move would be in place, something investors had been expecting. The Fed raised rates aggressively from March 2022 through July 2023, increasing them by 5.25 percentage points to combat the worst bout of inflation in 40 years.
The new monetary policy statement was approved unanimously.
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