WASHINGTON – Federal Reserve officials on Wednesday kept short-term interest rates steady but signaled that inflation is approaching its target, which could open the door to future rate cuts.
But central bankers gave no clear indication that a rate cut was imminent, opting to maintain language that pointed to ongoing concerns about economic conditions, albeit with progress. They also maintained a statement that more progress was needed before interest rates could be cut.
“The Committee judges that risks to the achievement of its employment and inflation goals continue to move toward better balance,” the Federal Open Market Committee said in its statement after the meeting, a slight improvement from previous language.
“Inflation has declined over the past year but remains moderately high. In recent months, some progress has been made towards achieving the Committee's 2% inflation target,” the statement added.
However, Fed Chairman Jerome Powell, speaking to the media, indicated that while no decision had been made on actions at future meetings, a cut could come in September if economic data showed inflation falling.
“If this test is met, a rate cut could be on the table as early as the next meeting in September,” Powell said.
Stocks React to Powell's Comments
Markets have been looking for signs that the Fed will cut interest rates when it meets in September, with futures prices pointing to further cuts at the November and December meetings, assuming quarter-point moves. Stocks rose to their highest levels of the day after Powell’s comments.
As for the Fed’s statement, its language was also an upgrade from the June meeting, when the policy statement noted only “modest” progress in reducing price pressures that were at their highest levels since the early 1980s two years ago. The previous statement also described inflation as simply “elevated,” not “moderately elevated.”
We also saw some other adjustments, with the Federal Open Market Committee voting unanimously to keep the benchmark overnight lending rate at a range of 5.25% to 5.5%. That rate, the highest in 23 years, has been in place over the past year, the result of 11 increases aimed at reducing inflation.
One change noted that committee members were “alert” to risks on both sides of its mandate to achieve full employment and low inflation, with the word “largely” dropped from the June statement.
However, the statement left one key sentence about the Fed's intentions intact: “The Committee does not expect it will be appropriate to reduce the target range until it has greater confidence that inflation is moving sustainably toward 2 percent.”
The statement underscored the Fed’s reliance on data. Officials insist they are not on a predetermined path for interest rates and will not be guided by forecasts.
Price pressures ease from 2022 peak
Recent economic data suggests that price pressures are now far from their peak in mid-2022, when inflation reached its highest level since the early 1980s.
The Fed’s preferred measure, the personal consumption expenditures price index, shows inflation running at about 2.5% a year, though other measures are slightly higher. The central bank targets 2% inflation and has insisted it will stick to that target despite pressure from some quarters to tolerate higher levels.
Although the US Federal Reserve has maintained its tightest monetary policy in decades, the economy has continued to expand.
Gross domestic product grew at an annual rate of 2.8% in the second quarter, well above expectations amid a boost from consumer and government spending and inventory restocking.
Labor market data was a bit less robust, though the unemployment rate of 4.1% is not far from what economists consider full employment. The Fed statement noted that unemployment “has risen but remains low.” A reading on Wednesday from payroll processing firm ADP showed private sector jobs grew by just 122,000 in July, suggesting the labor market may be weakening.
However, there was some positive inflation data in the ADP report, with wages rising at their slowest pace in three years. The Labor Department also reported Wednesday that wage, benefits and payroll costs rose just 0.9% in the second quarter, below expectations and the 1.2% rate in the first quarter.
Fed officials have vowed to tread carefully, despite signs of weak inflation and concerns that the economy won’t be able to sustain the highest borrowing costs in nearly 23 years for much longer. Their stance was bolstered on Wednesday when another economic report showed that pending home sales rose a stunning 4.8% in June, defying expectations for a 1% increase.
