After announcing that borrowing costs would remain at their highest level in 23 years for an eighth meeting, the Federal Reserve indicated they may start lowering rates by September.
At a Wednesday press conference, Fed chair Jay Powell said that the Federal Open Market Committee (FOMC’s) next meeting could see a possible reduction of the policy rate.
Focus shifts from inflation to the stability of the labour market
Powell said that policymakers had “really discussed” cutting interest rates. The FOMC also noted “further improvements” in reducing the inflation rate to its target of 2%.
Officials noted, however, that “greater assurance” would be required before they commit to a cut in rates.
Powell said that Powell’s confidence was boosted by the inflation data for the second quarter. He added that further positive numbers would confirm this.
Fed’s new stance shows a change from “100% focused on inflation”, to protecting the labour market. FOMC acknowledges new concerns about the labour market and affirms that inflation is no longer the main concern. The Fed is now taking into account the rising unemployment rate as it navigates through its policy.
Data on economic growth supports possible rate reductions
Recent data on the economy has confirmed Fed’s cautious optimism.
Based on the index of core consumer prices, Fed’s preferred measure for inflation has fallen to 2.6% from its peak in 2022.
The Fed is working to reach its 2% inflation target.
US employment market shows signs of cooling. The unemployment rate has risen to 4,1% and wage pressures have eased.
The slowdown in the job market indicates that inflation can be brought under control, without creating a recession.
The political and economic context of market reactions
The two-year Treasury rate fell by 0.01 points, or 0.01 percentage point, to 4.45% in response to Powell’s comments.
The futures markets traders expect between two to three rate reductions this year.
Stocks rose, both the S&P 500 (blue-chip index) and tech-heavy Nasdaq adding gains.
The Fed is confident that it can manage the economic challenges in a timely and effective manner.
This would be just in time for the presidential elections of November. The timing of this rate cut has attracted political attention.
Donald Trump, the Republican candidate for president, warned Powell not to cut rates until after the elections. Powell reiterated, however, the Fed’s independent status, saying:
Our tools are never used to oppose or support a particular political party, politician or political result.
Policy expectations and long-term perspective
It was expected that the Fed would make a unanimous decision this month to keep rates unchanged. Most policymakers expect that rates will fall by June to around 3% in 2026.
This projection indicates that monetary policy will be eased gradually to maintain economic growth, while also managing inflation and maintaining the stability of labour markets.
It is the central bank’s goal to have a “soft land” without significant disruption in economic activity. The Fed seems to be doing well so far. Prices are declining and unemployment is increasing at a moderate rate.
Federal Reserve’s hint at possible interest rate reductions starting in September is a subtle approach to managing the economy’s stability.
The Fed navigates a complicated economic environment by balancing its need to manage inflation and the necessity of supporting the labor market. In determining the direction in which US monetary policies will go in future, September’s FOMC meeting is crucial.
Post US Fed maintains interest rates at current levels, Powell indicates a rate cut for September could be updated as new information becomes available
