Fed keeps rates unchanged hints at possible cut in September as inflation moderates

The Federal Reserve as expected kept decades-high interests rates unchanged on Wednesday — but Fed Chair Jerome Powell gave the strongest signal yet that a possible cut “could be on the table” for September.

Powell’s remarks at his press conference following the end of theFed’s latest two-day policy meeting appeared as an affirmation of a coming pivot that was partly reflected in the central bank’snew policy statement.

A reduction in the policy rate could be on the table as soon as the next meeting in September, Powell said. Were getting closer to the point at which itll be appropriate to reduce our policy rate, but were not quite at that point.

Still, the Federal Open Market Committee acknowledged that the economy has been headed in the right direction, with job gains, unemployment and inflation seeming to moderate

“There has been some further progress toward the Committee’s 2% objective,” the policy-settingFOMC said in the statement after deciding to keep the central bank’s benchmark overnight interest rate in the 5.25%-5.50% range.

Powell went further, telling reporters “there is a growing sense of confidence that you could move at the next meeting” as long as coming inflation data affirms its recent softening trend.

The central bank uses the personal consumption expenditures price index for its 2% annual inflation target. The PCE price index rose 2.5% in June after exceeding 7% in 2022, and the month-to-month readings recently have shown it even closer to target.

Investorssaw Powell’s comments as clearly setting the stage for a reduction in borrowing costs at theFed’s Sept. 17-18 meeting, just seven weeks shy of the Nov. 5presidential election.

“Listening to him speak, it’s clear they’re all locked and loaded for September rate cut and they’re going to maintain their optionality,” said Mark Malek, chief investment officer at Siebert.

The stakes are high for Fed officials, who have been trying to navigate two risks. One is that they ease too soon, allowing inflation to become entrenched at a level above their 2% target. The other is that they wait too long and the economy crumples under the weight of higher rates.

The economy has been sturdy so far this year. Gross domestic product, the broadest measure of U.S. economic output, rose at a 2.1% annual rate during the first half of the year. While inflation was unexpectedly hot in the first quarter, more recent readings suggest a slowdown in price growth during the second half of last year has resumed and might be broadening.

What were seeing right now is better than last year, when price growth slowed rapidly but declines were concentrated in goods and not services, said Powell. This is a broader disinflation.

Central bankers have said it would be appropriate to reduce borrowing costs before inflation actually returns to their target to account for the time it takes monetary policy to affect the economy.

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But the jobless rate has been rising, and policymakers have put more focus of late on avoiding the sort of sharp rise in unemployment often associated with high interest rates and slowing inflation.

The Fed did not commit in its statement to a rate cut in September, and repeated that policymakers still need “greater confidence that inflation is moving sustainably toward 2%” before lowering borrowing costs.

But the changes seem consistent with that confidence being reached by September, something investors have been expecting. The Fed raised rates aggressively from March 2022 to July 2023, hiking the benchmark rate by 5.25 percentage points to combat the worst outbreak of inflation in 40 years.