WASHINGTON – Federal Reserve officials left short-term interest rates unchanged on Wednesday, but noted that inflation was moving closer to its target, opening the possibility of future rate cuts.
There were no obvious indications from central bankers that a cut was imminent, however. They stuck to their language that suggests continued concerns about the economic situation, albeit with progress. They also maintained their statement that further progress is needed before any rate cuts can be made.
“The Committee believes that the risks to the achievement of its employment and inflation objectives continue to balance each other,” said the Federal Open Market Committee in a statement after its meeting, which was slightly revised up from the previous wording.
“Inflation has eased over the past year but remains somewhat high,” the statement continued. “There has been some further progress toward the committee's inflation target of 2 percent in recent months.”
However, speaking to the media, Chairman Jerome Powell pointed out that while no decision had yet been made on measures to be taken at future meetings, a cut could come as early as September if economic data showed a decline in inflation.
“If this test is passed, a cut in our key interest rates could be on the table as early as the next meeting in September,” Powell said.
Stocks react to Powell comments
Markets had been looking for signs that the Fed would cut rates at its next meeting in September. Futures prices point to further cuts at the November and December meetings, with moves of a quarter of a percentage point assumed. Stocks rose to their highest of the day following Powell's comments.
As for the Fed's statement, it also represents an improvement over the June meeting. Back then, the Fed's statement had only spoken of “modest” progress in reducing price pressures, which two years ago were at their highest levels since the early 1980s. The previous statement also referred to inflation as merely “elevated” rather than “somewhat elevated.”
There were a few other adjustments, as the FOMC voted unanimously to keep the federal funds rate at 5.25 to 5.5 percent. That rate, the highest in 23 years, has been in place since last year and is the result of 11 hikes designed to reduce inflation.
An amendment noted that Committee members were “alert” to the risks on both sides of their mandate for full employment and low inflation. In the June statement, the word “very” was therefore deleted.
However, a key sentence about the Fed's intentions remained unchanged in the statement: “The Committee does not believe that a reduction in the target range is appropriate until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
This sentence underlines the Fed's dependence on data. The central bankers emphasize that they do not pursue a predetermined interest rate course and are not guided by forecasts.
Price pressure after peak in 2022
Recent economic data suggest that price pressures have eased significantly since their peak in mid-2022, when inflation reached its highest level since the early 1980s.
The Fed's preferred gauge, the personal consumption expenditures price index, shows annual inflation at around 2.5 percent, although other indicators show slightly higher readings. The central bank aims for 2 percent inflation and has insisted it will stick to that target despite pressure from some quarters to tolerate higher levels.
Although the Fed is sticking to its most restrictive monetary policy in decades, the economy continues to grow.
Gross domestic product grew at an annualized rate of 2.8 percent in the second quarter, well above expectations, due to an increase in private and government spending and a buildup of inventories.
Labor market data was a little less robust, although the 4.1% unemployment rate is not far from what economists consider full employment. The Fed's statement said unemployment “increased but remains low.” Statistics released Wednesday by payroll processing company ADP showed that the private sector added just 122,000 jobs in July, suggesting the labor market may be weakening.
However, the ADP report also included some positive inflation data. Wages rose at the slowest pace in three years. The Labor Department also reported on Wednesday that wages, benefits and salaries rose by just 0.9 percent in the second quarter. This was below expectations and below the 1.2 percent increase in the first quarter.
Fed officials have vowed to proceed cautiously despite signs of easing inflation and concerns that the economy cannot sustain the highest borrowing costs in 23 years for much longer. Their position was bolstered on Wednesday when another economic report showed that home sales rose an astonishing 4.8 percent in June, beating expectations for a 1 percent increase.