Key Takeaways
- Fed Chair Jerome Powell suggests a possible rate cut in September if economic conditions align.
- The central bank maintained its policy rate in the 5.25%-5.50% range but softened its stance on inflation.
- Republican lawmakers warned a September rate cut could be seen as politicized ahead of the U.S. elections.
Federal Reserve Chair Jerome Powell announced on Wednesday that interest rates might be cut as soon as September if the U.S. economy continues on its current path.
This decision comes as the central bank nears the end of its two-year battle against inflation, coinciding with the nation’s presidential election campaign.
Latest meeting
At the latest two-day policy meeting, the Fed chose to keep its benchmark interest rate steady at 5.25%-5.50%, a level maintained for the past year. The central bank’s statement softened its description of inflation, now emphasizing that risks to employment are comparable to those of rising prices, which hints at possible rate reductions.
Powell highlighted the easing of price pressures in his post-meeting press conference, stating that “quality” disinflation is occurring. He noted:
If we were to see inflation moving down … more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting.
Political moves
Republican lawmakers have warned that a rate cut in September, seven weeks before the elections, might be perceived as a political move. Powell, however, emphasized that the Fed’s decisions are based on economic data, not political considerations.
Investors reacted positively to Powell’s remarks, viewing them as a clear signal for a potential reduction in borrowing costs at the Fed’s upcoming September meeting. Interest rate futures, stocks, and Treasury bonds rallied, with the probability of a significant rate cut increasing.
The Fed’s policy statement acknowledged progress toward its 2% inflation target, with the personal consumption expenditures price index rising 2.5% in June. While the economy continues to expand at a solid pace, the unemployment rate remains low but has been gradually increasing.
