The US Federal Reserve has signaled that it could begin cutting interest rates as early as September, after US policymakers unanimously agreed to maintain borrowing costs at a 23-year high for the eighth consecutive meeting. "A cut to our base rate could already be on the table at the next meeting in September," said Fed Chief Jay Powell at a press conference on Wednesday, adding that there had been a "real discussion" about rate cuts within the Federal Open Market Committee (FOMC) this week.
The FOMC emphasized that "further progress" has been made in reducing inflation to the target of 2 percent. However, officials still need "greater confidence" before they are ready to lower rates. "The inflation figures for the second quarter have strengthened our confidence, and further good data would further solidify this confidence," Powell said, thereby supporting market expectations of a quarter-point rate cut in September.
The Fed no longer needs to be "100 percent focused on inflation," highlighting its shift towards securing the labor market. Should there be a significant economic downturn, the central bank would react but made it clear that it is not considering large, half-percentage-point rate cuts. In light of new concerns about the labor market, the FOMC emphasized that it is "attentive to the risks on both sides of its dual mandate" and no longer sees inflation as the primary issue. The rising unemployment rate is also a key focus of policy direction.
The interest rate cut in September, which could lower the key interest rate by a quarter point from the current 5.25-5.5 percent, is the last meeting before the presidential election in November. Donald Trump, the Republican presidential candidate, recently warned Powell against lowering interest rates before the election, stating he would allow the Fed Chairman to complete his term if he 'does the right thing'.
„We never use our instruments to support or reject a political party, a politician, or a political outcome," said Powell on Wednesday. Short-term Treasury yields fell during Powell's speech as investors slightly increased their bets on rate cuts this year. Traders in the futures market are still betting on two to three rate cuts, with the first expected in September, and slightly increased the likelihood that the central bank could make three cuts by December. The two-year Treasury yield, which moves with interest rate expectations, fell by 0.01 percentage points to 4.35 percent.
The blue-chip index S&P 500 and the tech-heavy Nasdaq both closed higher, extending their gains. Following a post-pandemic peak not seen in decades, inflation is now steadily decreasing towards the central bank's target. The Fed's preferred inflation indicator, based on the core Personal Consumption Expenditures Price Index, is now at 2.6 percent, after having exceeded 5 percent in 2022.
The U.S. labor market is also beginning to cool off from its previously rapid pace, with the unemployment rate rising to 4.1 percent in recent months. Wage pressures have also eased, as new data showed on Wednesday. In recent months, the focus of Fed officials has shifted from combating runaway inflation to ensuring that they do not harm the economy by maintaining high interest rates for too long. The central bank is attempting to achieve a "soft landing," where inflation is reduced to the target without causing a recession.
So far, this seems to be succeeding, as price pressures are easing without a sharp increase in layoffs. Employers are reducing hiring instead of cutting existing jobs. Powell said on Wednesday that the likelihood of a hard landing is 'low.' The unanimous decision to keep interest rates unchanged this month was largely expected. In June, most policymakers anticipated that interest rates would fall to 4-4.25 percent by the end of next year, before dropping to around 3 percent by 2026."
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