On Wednesday, July 31, the Federal Reserve decided to keep the interest rate at 5.25% to 5.50%, but clearly hinted that there might be a 25 basis point rate cut in September.
After a two-day meeting, Federal Reserve Chairman Jerome Powell indicated in a press conference that if economic data continues on its current trajectory, they may consider lowering rates at the next meeting.
“If the conditions are met, the possibility of lowering our policy rate could be on the table at the next meeting in September,” Powell said.
In its policy statement on Wednesday, the Federal Reserve made two significant modifications, changing the description of inflation to “slightly rising” and removing the language about being “highly concerned” about inflation risks.
The Wall Street Journal reported that the path for a rate cut in September has been cleared by the Federal Reserve. The article mentioned that the shift in the Fed’s language is significant, indicating that inflation may no longer be a barrier to rate cuts, especially if the labor market continues to cool down.
Recent economic data has shown a decrease in inflation numbers to the Fed’s 2% target, while the unemployment rate has climbed above 4%.
The Federal Reserve reiterated in its policy statement on Wednesday that it is focused on the “dual mandate” of full employment and stable prices.
Since July 2023, the Federal Reserve has maintained the benchmark interest rate in the 5.25% to 5.5% range, marking a new high in rates over the past 20 years. The timing of when the Fed will start cutting rates has been closely watched by observers.
“The committee’s overall view is that the economy is nearing the point where a reduction in the policy rate would be appropriate,” Powell said, emphasizing that the decision on rate cuts will be based on data, but not solely on data points.
“The question is whether the overall picture, evolving economic outlook, and risk balance are consistent with rising inflation and a stable labor market,” he added.
So far, the U.S. economy has been robust. As the broadest measure of U.S. economic output, the GDP in the first half of the year reached a 2.1% annual growth rate. Although inflation unexpectedly picked up in the first quarter, recent data indicates a slowdown in price growth, which may be expanding.
Powell remarked, “What we’re seeing now is better than last year.” Compared to last year, where price declines were concentrated in goods rather than services, this time it’s a more widespread monetary tightening.
In June, the Personal Consumption Expenditures Price Index (the Fed’s preferred inflation measure) showed a 2.5% year-over-year increase. The next nonfarm payrolls report is set to be released on Friday, with some economists expecting a slowdown in hiring.
“I believe the current labor market is unlikely to be a significant source of inflationary pressure. Therefore, I do not want to see further cooling in the labor market,” Powell stated.
Currently, the total number of job cuts by companies remains relatively low, but the hiring rate is also significantly decreasing. The period of time for job seekers in the working-age population has lengthened, with the unemployment rate rising slightly from 3.7% at the beginning of the year to 4.1% in June.
When asked if officials are concerned that this might indicate further weakness in the labor market, Powell mentioned, “We are closely monitoring this.”
Powell also hinted on Wednesday that the next potential rate cut would likely be 25 basis points (0.25%). He stated that a 50 basis point cut is not currently under consideration, and any further rate cuts in future meetings will also depend on economic data.
The next meeting of Federal Reserve officials is scheduled for September 17-18. Powell will attend the Jackson Hole Economic Policy Symposium at the end of August, where his public remarks will provide more policy signals to observers.