The Federal Reserve announced tonight that it will keep interest rates steady, citing the need for “greater confidence” regarding inflation.
Policymakers unanimously voted to maintain the US central bank’s benchmark interest rate between 5.25% and 5.50%, according to the Fed’s statement.
The statement noted: “Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.”
However, the Fed added: “The [Federal Open Market Committee] does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent … The Committee is strongly committed to returning inflation to its 2 percent objective.”
US inflation has been steadily approaching the Fed’s 2% target for several months. Meanwhile, the job market has cooled, with the unemployment rate rising by about half a percentage point this year to 4.1%.
The Fed’s preferred measure of inflation eased to an annual rate of 2.5% last month, while economic growth has remained resilient.
In tonight’s statement, the Fed revised its usual language, shifting from being “highly attentive to inflation risks” to acknowledging that policymakers are now “attentive to the risks to both sides of its dual mandate,” which includes a charge from the US Congress to maintain maximum employment consistent with stable prices.
Futures traders remain confident that a September rate cut is likely, with markets almost fully pricing in this expectation.
Fed Chairman Jerome Powell told reporters that the US central bank could make its first post-pandemic interest rate cut “as soon as” September. “The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate,” he said at a press briefing, adding that inflation has eased “notably” in recent years.
Fed officials have emphasized balancing the need to keep rates high enough to control inflation without causing a recession by keeping them too high for too long.
Rate cuts could help the Fed achieve a “soft landing,” where high inflation is defeated without triggering an economic downturn. This outcome could also impact this year’s presidential race, as Republicans have linked Vice President Kamala Harris to the inflation spike of the past three years. Former President Donald Trump has stated the Fed shouldn’t cut rates before the election.
Christopher Waller, a member of the Fed’s governing board, commented earlier this month: “While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”
Meanwhile, traders are anticipating the Bank of England’s interest rate decision on Thursday.
Experts suggest that the Bank of England could be encouraged to cut interest rates for the first time in over four years, given growing evidence that inflation has been tamed.
Sam North, market analyst at investment platform eToro, said: “Money markets are currently giving a 60% chance of a [Bank of England] cut, and the recent rhetoric from the [bank] has been mixed, with some members suggesting a hawkish stance and others advocating for rate cuts.
Yet with headline CPI [inflation] at the 2% target, GDP growth for the month exceeding expectations at 0.4% and data indicating positive growth in services and manufacturing, there’s a strong case for a long-awaited rate cut to finally take place. If the BoE decides to keep rates on hold, in what would be a slight shock to the market, investors can expect [the pound to strengthen] and FTSE weakness.”
