The Federal Reserve has indicated it could start lowering interest rates as early as September, following a decision by US policymakers to maintain borrowing costs at a 23-year high for the eighth consecutive meeting.
“A reduction in our policy rate could be on the table as soon as the next meeting in September,” Fed Chair Jay Powell announced during a press conference on Wednesday. He noted that there had been “a real discussion” about cutting rates at the Federal Open Market Committee (FOMC) meeting this week.
The FOMC highlighted “further progress” towards reducing inflation to its 2% target but emphasized the need for “greater confidence” before making any rate cuts.
“The second quarter’s inflation readings have bolstered our confidence, and additional positive data would further strengthen that confidence,” Powell said, reinforcing market expectations of a quarter-point cut in September.
The Fed’s shift from being “100% focused on inflation” to also prioritizing the labor market was underscored. Powell reiterated that the central bank would respond to a significant economic downturn but clarified that larger rate cuts, such as half-percentage-point increments, were not under consideration.
Acknowledging new concerns over the labor market, the FOMC stated on Wednesday that it was “attentive to the risks to both sides of its dual mandate,” indicating that rising unemployment was now a critical concern alongside inflation.
The September meeting, where the Fed is expected to lower its benchmark interest rate by a quarter point from its current 5.25-5.5%, will be the last before the November presidential election.
Donald Trump, the Republican presidential candidate, recently warned Powell not to cut rates before the election, suggesting he would allow Powell to complete his term if he was “doing the right thing.”
“We never use our tools to support or oppose a political party or a politician or any political outcome,” Powell stated on Wednesday.
Short-term Treasury yields fell as Powell spoke, with investors increasing their bets on rate cuts this year. Traders in the futures market are anticipating two to three cuts, starting in September, with a slight increase in the likelihood of three cuts by December.
The two-year Treasury yield, which reflects interest rate expectations, dipped by 0.01 percentage points to 4.35%.
The blue-chip S&P 500 and the tech-heavy Nasdaq both saw gains on the day.
After reaching its highest level in decades post-pandemic, inflation is now steadily declining towards the central bank’s target. The Fed’s preferred inflation gauge, based on the core personal consumption expenditures price index, is now at 2.6%, down from a peak of over 5% in 2022.
The US labor market is also slowing from its previously rapid pace, with the unemployment rate rising to 4.1% in recent months. Wage pressures have eased, as shown by new data released on Wednesday.
In recent months, Fed officials have shifted their focus from controlling runaway inflation to ensuring they do not harm the economy by maintaining high rates for too long. The central bank aims to achieve a “soft landing,” reducing inflation to its target without triggering a recession.
So far, it appears to be succeeding, with declining price pressures and no significant increase in layoffs, as employers have reduced hiring rather than cutting existing jobs. Powell stated on Wednesday that the odds of a hard landing were “low.”
The unanimous decision to keep rates on hold this month was widely expected.
As of June, most policymakers projected rates to fall to 4-4.25% by the end of next year, with a further decline to around 3% by 2026.