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Fed holds rates steady, remains on track to cut in September
The Federal Reserve held interest rates steady on Wednesday but hinted the central bank is moving closer to a cut, citing “some additional progress” toward its goal of bringing inflation to 2%.
Fed officials voted to keep their benchmark interest rate in a range of 5.25%-5.50%, a 23-year high. The decision was unanimous.
The federal funds rate has been in that range since last July as part of the Fed’s aggressive campaign to rein in inflation that has soared during the pandemic.
But Fed officials have hinted they are approaching the confidence needed to cut rates as inflation continues to cool and the labor market slows, making a cut at their next meeting on Sept. 17-18 increasingly likely.
“In recent months, there has been some progress toward the Committee’s 2% inflation goal,” officials with the Fed’s Federal Open Market Committee said in their policy statement released Wednesday.
That marked a shift from the “moderate further progress” cited in an earlier statement released at the Fed’s last meeting in June.
Another sign that a cut may be near came as policymakers noted that the risks to both sides of their dual mandate — price stability and full employment — “continue to balance better.”
This was a shift from “moving toward better balance.”
Traders and investors will be listening closely to Jerome Powell’s press conference today for more clues on the future direction of monetary policy. Photo: REUTERS/Brendan McDermid (Reuters/Reuters)
Officials maintained cautious language in their policy statement, saying that “the Committee does not expect it to be appropriate to lower the target until it has gained greater confidence that inflation is moving sustainably towards 2 percent.”
They also characterized inflation as “somewhat” high, even as they reiterated that it had declined last year.
Read more: What the Fed Rate Decision Means for Bank Accounts, CDs, Loans, and Credit Cards
The language changes made in Wednesday’s statement came after some top Fed officials stressed in the weeks leading up to Wednesday’s meeting that they were getting closer to having confidence inflation was falling sustainably to the 2% target.
That confidence had dipped somewhat after higher-than-expected inflation readings in the first quarter. But three straight months of better data have restored some optimism.
The latest assurance came last Friday when a new reading of the Fed’s preferred inflation gauge — the core Personal Consumption Expenditures (PCE) index — showed its smallest annual gain in more than three years.
June’s 2.6 percent annual increase was the same level as May and down from 2.8 percent in April. On a three-month annualized basis, core PCE fell to 2.3 percent from 2.9 percent.
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Another measure of inflation, the Consumer Price Index (CPI), also showed progress.
On a core basis — which excludes volatile food and energy prices that the Fed can’t control — CPI rose 3.3% year over year in June. That was down from 3.4% in May and 3.6% in April.
Fed officials have also made clear they are paying closer attention to the slowing labor market, another sign that cuts are likely coming.
The unemployment rate has risen for two straight months to 4.1% — higher than what some Fed officials had predicted the rate would be at the end of this year.
Fed officials in their policy statement released Wednesday noted that job gains have moderated. While the unemployment rate has risen, they said, it remains “low.”
Most Fed watchers ahead of Wednesday’s meeting said the central bank still needed a bit more time to be certain about the cuts while also preparing markets for the significant actions to come.
In fact, some Fed officials have indicated that they need more than one quarter of good data to know for sure that inflation is headed in the right direction. They may want to see what the July and August readings show first.
Read more: Fed Forecasts for 2024: What Experts Say About the Possibility of a Rate Cut
A rate cut in September could see the central bank face political criticism from both sides of the aisle in Washington.
Lawmakers from both parties have flagged They would criticize the Fed if a decision made at the last meeting before Election Day was not to their liking.
If Powell and his colleagues decide to keep rates at their highest level in 23 years, a growing chorus of Democratic critics calling for cuts could reach a crescendo.
But if the government does make cuts, Republicans, from Donald Trump on down, will surely launch
the measure as a way of giving in to election year pressure.
In an interview with Bloomberg published earlier this month, the Republican candidate reiterated again that central bank officials should not ease monetary policy ahead of the November elections.
“It’s something they know they shouldn’t do,” Trump said.
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