The Fed is holding interest rates steady, but a cut is likely to come in September

[ad_1]

The Federal Reserve held interest rates on hold on Wednesday but US central bank chief Jerome Powell said policymakers may be ready to cut borrowing costs as soon as they meet in September, with the latest data adding to their hope that inflation will be in line with their 2. % target.

Powell’s remarks at his press conference after the end of the Fed’s latest two-day policy meeting were seen as confirmation of the upcoming pivot in September that was partially reflected in the central bank’s new policy statement.

“There has been further progress towards the Committee’s 2% target,” the Federal Open Market Committee said in a statement after deciding to keep the central bank’s overnight interest rate at 5.25%-5.50%.

Powell continued, telling reporters that “there is a growing sense of confidence that it may move into the next meeting” as long as upcoming inflation data confirms its recent easing.

The central bank uses the consumer price index for its annual inflation target of 2%. The PCE price index rose 2.5% in June after exceeding 7% in 2022, and the latest month-on-month reading showed it is even closer to the target.

Investors saw Powell’s comments as clearly setting the stage for further reductions in borrowing costs at the Fed’s Sept.

“Listening to him, it’s clear that they’re all locked and loaded to cut September prices and they’re going to continue to pick,” said Mark Malek, chief investment officer at SiebertNXT.

Interest rate futures, stocks and Treasury bonds all rallied heavily on Powell’s words, so the odds of the first cut in September were as large as a fraction of a percentage point jumping to nearly 15%, according to CME Group’s FedWatch tool. Powell, however, said a 50-point cut was not under consideration.

Dual mandate

While Fed officials are wary of any actions that could derail their data-not-politics approach to setting monetary policy, the steady decline in inflation in recent months has led to a broad consensus that the war on inflation is nearing an end.

Inflation, the Fed said, is now “somewhat higher,” a significant drop from the assessment it has used throughout its fight against rising rates that were “raised.”

“We have not made any decisions about future meetings” when it comes to rate cuts and all policy decisions will be made on a meeting-by-meeting basis, Powell said at his press conference. But he added that since Fed officials have been gaining hope that price pressures are easing, “the economy is getting closer to where it will be appropriate to lower our policy rate.”

The Fed’s policy statement also removed the staid language that it was “watching inflation risks closely,” and replaced it with an acknowledgment that policymakers now “were paying attention to risks on both sides of their dual mandate,” which includes a charge from Congress to maintain high employment coupled with stable rates.

US central banks say it is not appropriate to cut borrowing costs before inflation returns to their target to account for the time it takes for monetary policy to affect the economy.

So far the economy has “continued to grow at a strong pace,” the Fed said in its statement, and while “job gains have slowed,” the unemployment rate “remains low.”

But the unemployment rate has been rising, and policymakers have focused more recently on avoiding the kind of sharp increases in unemployment that are often associated with higher interest rates and lower inflation.

The Fed was non-committal in its September rate cut statement, and also said that policymakers still need “high confidence that inflation is on a sustainable path to 2%” before reducing borrowing costs.

But the changes seem to be in line with the confidence reached in September, which investors had been expecting. The Fed hiked rates sharply from March 2022 to July 2023, raising the benchmark rate to 5.25 percent to combat the worst bout of inflation in 40 years.

The new policy statement was unanimously approved.

-Howard Schneider, Reuters

Lindsay Dunsmuir, Ann Saphir, Michael S. Derby and Chibuike Oguh contributed to this report.

[ad_2]

Source link