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Dive Brief:
- The Federal Reserve on Wednesday by unanimity maintained the main interest rate in a range between 5.25% and 5.5%, and slowly opened the door for a possible rate cut in September that would mark a crucial move for the central bank’s monetary policy.
- While the Federal Open Market Committee has not made “any decisions” about future meetings, including the September meeting, the broad sense is that they are getting closer to the point.”where it will be appropriate to reduce our political rate,” Federal Reserve Chairman Jerome Powell said Wednesday in response to questions.
- A September cut could be on the table if inflation falls quickly or relatively in line with expectations, but “yes Inflation should prove stickier, we’ll weigh that along with other readings … the inflation data, the employment data, the entirety of that,” Powell said.
Diving knowledge:
The expected September cut would represent the first cut in the federal funds rate in nearly four years and would come after the central bank held rates steady at a 23-year high for a year.
The central bank reiterated his position Wednesday that he “does not expect it would be appropriate to lower the target range until he has gained more confidence that inflation is moving sustainably toward 2 percent.”
Policymakers also pointed to their continued focus on striking the tough balance of achieving price stability while avoiding triggering high unemployment in the labor market, which has shown signs of cooling in recent months.
Supply and demand conditions in the labor market have reached a “better balance,” Powell said Wednesday. Wage growth has also slowed as the gap between available jobs and workers has continued to narrow, leaving the labor market roughly where it was at the brink of the pandemic: “strong, but not overheated,” he said .
The Fed’s decision to hold rates steady comes after the core consumer price index rose at its slowest pace since 2021 in June, giving the Fed more confidence that her strategy to curb inflation is seeing results, CFO Dive previously reported. The CPI, excluding food and energy, rose 0.1% in June com compared with 0.2% in May, according to Labor Department data, while the personal consumption expenditure price index — the Fed’s preferred measure of inflation — fell to 2.6% in may
The second-quarter gains, which came after an unexpected increase in price pressures in the first quarter, have prompted the central bank to shift its focus to the labor market, Powell said earlier this month. Powell has previously indicated the central bank would seek to cut rates before inflation fell to its 2% target to achieve a so-called “soft landing”, where inflation slows without increasing unemployment.
The unemployment the rate rose to 4.1%. June from its rate of 4% in May, according to June data from the Labor Department. The number of vacancies was unchanged at 8.2 million at the end of June, with the number of hires little changed at 5.3 million, but down 554,000 for the year, the Labor Department said in a statement on Tuesday.
Powell said the Fed continues to watch the labor market closely. When asked if the central bank was “confident” that waiting until September to cut rates would not negatively affect unemployment, Powell responded by saying that “certainty is not a word we have in our business.” The Fed’s confidence that it is approaching the point where easing restrictions will be appropriate is growing, but the central bank will continue to weigh the “totality” of the data between now and September, he said.
Powell was also asked about how the central bank is considering the potential impact of the upcoming election on monetary policy as the Republican and Democratic candidates outline their potential economic plans. Former President Donald Trump also previously warned the Fed against cutting rates ahead of the election in an interview with Bloomberg earlier this month.
Anything the Fed does”before, after and during the election” will be strongly data-driven, Powell said in response to questions.
“We don’t act as if we know … we would never try to make political decisions based on the outcome of the election,” he said.
After the meeting, investors put close to true the odds that the Fed will cut rates at its September meeting, 83.6% predicted the central bank will cut rates to a range between 5.25% and 5.0%, according to the CME FedWatch tool at press time . Investors also predicted the Fed would continue to cut rates back-to-back during its November and December meetings, according to the tool.
