The Federal Reserve said Wednesday it would keep interest rates on hold but signaled it could cut rates in September if inflation continues to fall toward its 2% target.
The Federal Open Market Committee acknowledged that the economy is moving in the right direction, with job gains, unemployment and inflation trending down, but reiterated that more confidence is needed before lowering interest rates.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the effects of upcoming information on the economic outlook,” the FOMC said in a note on Wednesday.
“If risks emerge that would impede the achievement of the Committee’s objectives, the Committee stands ready to adjust the stance of monetary policy appropriately,” the statement said.
The FOMC said it would continue to consider labor market conditions and inflation data to determine the appropriate time to lower interest rates.
The central bank has kept the federal funds rate unchanged at a range of 5.25% to 5.5% since July last year.
Officials are aiming to give the U.S. economy a “soft landing” — keeping inflation down without triggering a recession through high interest rates.
Powell and other members of the committee have previously said they need more confidence that inflation is heading toward the Fed’s 2% target before cutting rates.
The Fed’s preferred inflation measure rose 2.5% year-on-year in June, according to personal consumption expenditures (PCE) price index data.
Core PCE inflation, which excludes volatile food and energy prices, rose at a 2.6% pace.
According to the Bureau of Labor Statistics, inflation fell sharply in 2023, dropping from an average inflation rate of 8.0% in 2022 to an average inflation rate of 4.1% in 2023, before rising again earlier this year.
Labor cost growth has been slower than expected, which could also prompt the Fed to cut interest rates.
Compensation costs for private and government employees rose 0.9 percent in the second quarter that ended in June, according to the Bureau of Labor Statistics.
The 0.9% increase was weaker than the 1.0% growth expected by economists surveyed by FactSet.
The small increase was also a turnaround from the 1.2% increase in the first quarter.
Compensation expenses rose at a more moderate rate year over year, rising 4.1% in the second quarter compared to 4.2% in the first quarter, below the 4.3% increase economists had expected.
The Bureau of Labor Statistics is expected to report that nonfarm payrolls rose by 175,000 in July, following a gain of 206,000 in June.
The unemployment rate is expected to remain at 4.1%.
Labor market and CPI data for July and August will likely influence the Fed’s September decision, as a slowing job market and subdued inflation could prompt it to cut interest rates.
Based on pricing in interest rate futures markets, there is an 88% chance of a quarter-point cut in September, and a 12% chance of a half-point cut.
Some analysts have suggested the Fed will implement a series of rate cuts. According to Barron’s AdvisorsThe first rate cuts are due to come in September, with further cuts due in 2025.
Americans have been keeping a close eye on the state of the economy, especially as investors have watched stock prices fluctuate in the wake of the presidential election, in which President Joe Biden withdrew after a disastrous debate and was replaced by Vice President Kamala Harris.
For example, Bitcoin stock prices soared after former President Donald Trump was shot in an assassination attempt that left him bleeding from the ear.
Crypto investors are betting big on another Trump victory following his speech at the 2024 Bitcoin Conference, as President Trump has reversed his crypto policy from 2019 and now appears to support looser industry regulation.
Meanwhile, lingering inflation caused by the pandemic is hurting consumers, who, though it has slowed, are still cutting back on nonessential spending, such as eating out at restaurants or fast-food chains.
Americans have been hit with higher interest rates on mortgages, auto loans, and credit cards thanks to a series of massive price hikes by the Federal Reserve.
Those hikes — 11 in 2022 and 2023 — were in response to a surge in inflation in the spring of 2021 as the economy recovered from the pandemic-era recession.
Russia’s invasion of Ukraine in early 2022 also hit the economy, sending energy and grain prices soaring.
Economists had expected long-term inflation to push the U.S. economy into recession, but the economy has remained relatively stable, increasing pressure on the Fed to cut interest rates.
