Fed holds interest rates steady, but hints at cut ahead
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Fed chair Jerome Powell at a press conference in June. Photo: Brendan Smialowski/AFP via Getty Image
The Federal Reserve kept interest rates at a two-decade high on Wednesday, while leaving the door open for rate cuts as soon as its next meeting in September.
Why it matters: Inflation has receded alongside signs that high borrowing costs are taking a toll on the labor market—raising expectations that the Fed will lower rates soon.
- In a unanimous decision, the Fed kept its policy rate in a range of 5.25% and 5.5%, where rates have remained since last July.
What they're saying: "The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," chair Jerome Powell said in a post-meeting press conference.
- "The question will be whether the totality of the data evolving outlook in the balance of risks are consistent with rising confidence on inflation and maintaining a strong labor market," Powell said.
- "If that test is met, a reduction in our policy rate could be on the table, as soon as the next meeting in September," he added.
State of play: The central bank said it remains "attentive" to the risks to the labor market and inflation, a change from the last policy statement that pointed only to inflation risks.
- The Fed statement says that "job gains have moderated," instead of the previous characterization that the labor market "remains strong." It also said that the unemployment rate has moved up, though it is still low.
- Inflation remains "somewhat" elevated, the statement said.
The big picture: Recent economic data shows inflation is moving closer to the Fed's target and the labor market is slowing.
- The Fed's go-to inflation gauge was 2.5% in June compared to the same period a year ago, well-below the 7% peak in 2022.
- It's the latest sign to confirm that the rebound in inflation at the start of the year that spooked Fed officials was an anomaly.
- Meanwhile, hiring has slowed and the job market has softened. The unemployment rate is still historically low, but it has risen 0.4 percentage point since the beginning of the year.
The intrigue: Projections released after the Fed's policy meeting in June showed officials on the fence about whether it expected one or two rate cuts this year.
- Financial markets expect a September rate cut is a near certainty and see a strong probability of two more cuts before year-end.
Editor's note: story was updated with comment from Powell's press conference.
