2024-07-31 19:30:17
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The Federal Reserve said it could start cutting interest rates as early as September after U.S. policymakers voted for an eighth straight time to keep borrowing costs at their highest level in 23 years.
“We could be talking about lowering our policy rate as early as our next meeting in September,” Federal Reserve Chairman Jay Powell said at a press conference on Wednesday, adding that the Federal Open Market Committee had had a “real discussion” about cutting rates this week.
The Federal Open Market Committee said it had made “further progress” toward its 2% inflation target, but officials needed “greater confidence” before they were willing to cut rates.
Powell said: “The second quarter inflation data has strengthened our confidence, and more good data will further strengthen this confidence,” which has strengthened market expectations of a 25 basis point rate cut in September.
The Fed no longer needs to be “100% focused on inflation,” highlighting its shift toward protecting the labor market. If a deeper recession were to occur, Powell reiterated that the central bank would respond but made clear it would not consider a larger (half-percentage-point) rate cut.
The Federal Open Market Committee said on Wednesday that it is aware of new labor market concerns facing the Fed and that it is “watching the risks to its dual mandate” and confirmed that it no longer views inflation as its primary concern, but instead views rising unemployment as the primary consideration in setting the path of policy.
The Fed’s September meeting will be the last before the November presidential election and is expected to cut the benchmark interest rate by 25 basis points from the current 5.25-5.5%.
Republican presidential candidate Donald Trump recently warned Powell against cutting interest rates before the November election and said that if elected, he would let the Fed chairman serve out his term as long as he “does the right thing.”
“We never use our tools for or against any party, politician or any political outcome,” Powell said Wednesday.
Short-term Treasury yields fell after Powell’s speech, and investors slightly increased their bets on rate cuts this year. Futures market traders are still betting that the Fed will cut rates two or three times, with the first cut coming in September, but slightly increased the probability that the central bank will cut rates three times by December.
The two-year Treasury yield, which moves with interest rate expectations, edged lower, down 0.01 percentage point to 4.35%.
The blue-chip S&P 500 and tech-heavy Nasdaq both rose on the day, extending gains.
Inflation, which surged to its highest level in decades in the wake of the pandemic, is now steadily falling toward the central bank’s target.
The Fed’s preferred inflation measure, based on the core personal consumption expenditures price index, is currently at 2.6% and is set to peak above 5% in 2022.
The U.S. labor market has also begun to slow from its early torrid state, with the unemployment rate rising to 4.1% in the past few months. New data on Wednesday showed wage pressures easing as well.
In recent months, Fed officials’ focus has shifted from taming runaway inflation to ensuring the economy is not harmed by keeping interest rates too high for too long.
The central bank is working to achieve a “soft landing” by bringing inflation back to its target without tipping the economy into recession.
So far, the effort appears to be succeeding, with price pressures falling and layoffs not increasing sharply as employers cut back on hiring rather than cutting existing jobs. Powell said on Wednesday the chances of a hard landing for the economy are “low.”
The unanimous decision to keep interest rates unchanged this month was widely expected.
As of June, most policymakers expected rates to fall to 4-4.25% by the end of next year and then to around 3% by 2026.
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