The Federal Reserve made no changes to interest rates following its July Federal Open Market Committee meeting (FOMC) on Wednesday. It has kept the federal funds rate at 5.25%-5.50%, where it has been for the past year.
It was not surprising that most economists and analyst’s expected a rate drop to occur at the FOMC meeting in September, if not earlier.
In its statement, however, the Federal Reserve noted positive progress towards its goal of stable prices or 2% inflation and maximum employment. The committee said that the risks to achieving this goal “continue to improve balance” and acknowledged an uncertain economic outlook.
The inflation rate has been declining for three months in a row, as measured both by the Consumer Price Index and Personal Consumption Expenditures. In June, PCE, which is the Fed’s preferred measurement, fell to 2.5% while CPI fell to 3.0%.
In a recent statement, the FOMC stated that “recent indicators suggest economic activity has continued at a solid rate of expansion.” “Job growth has moderated and the unemployment rate is up, but still low. The inflation rate has slowed over the last year, but it remains elevated. In recent months, the committee has made some progress towards its 2 percent inflation target.”
Rate cuts “on the table” for September
Rate cuts “on the table” for September
The committee has said that it will not reduce the federal funds rates until it is more confident that inflation is moving towards 2 percent.
Fed Chair Jerome Powell, in his press conference following the July FOMC Meeting Wednesday afternoon, said that the committee has gained greater confidence over the past three months and that more good data will cause the FOMC gain even greater confidence.
Powell said, “Our confidence is increasing because we are getting good data.”
Powell said that the committee was “close” to lowering the federal fund rate, but not quite there yet.
Powell was asked about the possibility of a rate cut in September. He said that if inflation continues its downward trend, economic growth is strong, and employment remains at the current pace, then “a rate reduction could be on the table.”
Powell said that no decisions have been made regarding the September meeting or future meetings, as all of the decisions will be based on the data. “Everything we do, before, during or after the elections, will depend on data,” Powell said.
Powell responded that the inflation rate is lower now than it was last year, when rates were falling sharply. He said that what they are seeing is better. Last year’s drop was mainly due to lower prices of goods. “But this is a wider disinflation,” he said, including lower prices not only for goods but also for housing and non-housing service.
Markets are becoming more confident
Markets are becoming more confident
The markets are now more confident about a rate cut in September. CME’s FedWatch, which polls rate traders, places the odds of a September 25-basis-point rate cut at 93.5%. 6.4% call for a subsequent 50-basis-point rate cut. Around 60% expect another cut in November. 57% predict a rate of 4.50%-4.75% in December. This would be three 25 point rate cuts.
The S&P 500 surged shortly after 2:00 p.m. The S&P 500 surged after 2:00 p.m. Powell’s presser.
As of 3:00 pm, the S&P 500 was 2% higher on the day. The Nasdaq gained 523 points or 3% and the Dow gained a total of 438 points or 1%.
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