The Fed is keeping interest rates stable and seeing progress on inflation

WASHINGTON — Federal Reserve officials held short-term interest rates steady Wednesday but indicated inflation is moving closer to its target, which could open the door for future rate cuts.

However, central bankers have given no clear indications that a cut is imminent, choosing to continue using language that points to continued concerns about economic conditions, albeit with progress. They also maintained a statement that more progress is needed before rate cuts can happen.

“The Committee believes that the risks to achieving its employment and inflation objectives are increasingly balanced,” said the Federal Open Market Committee statement after the meeting, a slight improvement from the previous language use.

“Inflation has declined over the past year but remains somewhat elevated,” the statement continued. “There has been some further progress towards the Committee’s 2 percent inflation target in recent months.”

However, speaking to the media, Chairman Jerome Powell indicated that while no decisions have been made on actions at future meetings, a cut could come as early as September if economic data show inflation is easing.

“If that test is met, a cut in our policy rate could be on the table as early as the next meeting in September,” Powell said.

Markets have been looking for signs that the Fed will cut rates at its next meeting in September, with futures prices pointing to further cuts at its November and December meetings, assuming a quarter-percentage point increase. Shares rose to the highest level of the day after Powell’s comments.

As for the Fed’s statement, its language also represented an upgrade from the June meeting, when the policy statement indicated only “modest” progress in reducing price pressures that were at their highest levels since inception two years ago. of the eighties. The previous statement also described inflation as simply ‘increased’, rather than ‘slightly increased’.

There were a few other adjustments, as the FOMC unanimously voted to keep overnight rates between 5.25% and 5.5%. That rate, the highest in 23 years, has been in place for the past year, the result of 11 increases aimed at reducing inflation.

One change noted that committee members are “attentive” to the risks on both sides of the full employment and low inflation mandate, and removed the word “very” from the June statement.

Still, the statement left intact one key sentence about the Fed’s intentions: “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

This sentence underlines the Fed’s data dependence. Officials insist they are not on a predetermined path for rates and are not guided by forecasts.

Recent economic data shows that price pressures are far from simmering since peaking in mid-2022, when inflation reached its highest level since the early 1980s.

The Fed’s favorite measure, the personal consumption expenditure price index, points to inflation at around 2.5% per year, although other measures show slightly higher figures. The central bank is targeting inflation of 2% and has insisted it will stick to that target despite pressure from some quarters to tolerate higher levels.

Although the Fed has maintained its tightest monetary policy in decades, the economy has continued to grow.

Gross domestic product grew 2.8% year on year in the second quarter, well above expectations, thanks to a boost in consumer and government spending and inventory replenishment.

The labor market data is somewhat less robust, although the 4.1% unemployment rate is far from what economists consider full employment. The Fed statement noted that unemployment “has increased but remains low.” A report from payroll processing company ADP on Wednesday showed that private sector job growth was just 122,000 in July, indicating the labor market could be weakening.

However, there was some positive inflation data in the ADP report, with wages rising at the slowest pace in three years. Also Wednesday, the Ministry of Labor reported that the cost of wages, benefits and salaries rose just 0.9% in the second quarter, below expectations and below the level of 1.2% in the first quarter.

Fed officials have vowed to proceed cautiously despite signs that inflation is weakening and concerns that the economy will not be able to withstand the highest borrowing costs in about 23 years for much longer. Their position got some reinforcement on Wednesday, when another economic report showed that pending home sales rose as much as 4.8% in June, beating expectations of a 1% increase.