The Federal Reserve decided to keep interest rates unchanged on Wednesday but signaled the possibility of lowering borrowing costs as soon as its next meeting in September, given that inflation is moving closer to the Fed’s 2% target.
The Federal Open Market Committee (FOMC) maintained its benchmark overnight interest rate at 5.25%-5.50% but suggested that a rate cut could be on the table for the September 17-18 meeting, which is just seven weeks before the U.S. elections on November 5.
In its statement, the Fed acknowledged that there has been “some further progress towards the Committee’s 2% objective.” This marks a shift from its previous characterization of inflation as “elevated,” indicating a more optimistic view on inflation’s trajectory. Inflation is now described as “somewhat elevated,” a notable downgrade from earlier assessments.
The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, rose by 2.5% in June after having exceeded 7% in 2022. The central bank typically targets a 2% annual inflation rate.
Additionally, the Fed revised its language, removing the phrase “highly attentive to inflation risks” and replacing it with a more balanced view that includes concerns about both inflation and employment. This reflects its dual mandate to promote maximum employment while maintaining stable prices.
While the Fed did not commit to an interest rate cut in September, it noted that monetary policy often requires time to influence the economy. The statement implied that if inflation continues to trend towards the 2% target, a rate reduction could be appropriate.
The Fed’s statement emphasized that the economy “has continued to expand at a solid pace” and that job gains have moderated while the unemployment rate remains low. However, there is growing concern about avoiding a sharp rise in unemployment, which can occur with high interest rates and slowing inflation.
The Fed’s decision to potentially lower rates in September aligns with investor expectations. The central bank had previously raised rates aggressively from March 2022 to July 2023, increasing the benchmark rate by 5.25 percentage points to tackle the highest inflation in 40 years.
Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EDT (1830 GMT) to discuss the latest policy statement and provide further insights into the economic outlook and future interest rate decisions.
The policy statement was approved unanimously by the FOMC.