The Federal Reserve announced Wednesday interest rates will remain unchanged — but hinted at a possible cut in September if inflation continues to dip downward toward its 2% goal.
The Federal Open Market Committee acknowledged that the economy has been headed in the right direction, with job gains, unemployment and inflation seeming to moderate – but reiterated that it needs greater confidence before cutting rates.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” the FOMC said in a note on Wednesday.
“The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals,” it said.
The FOMC said it would continue to look at labor market conditions and inflation data to determine the right time for rate cuts.
The central bankers have held the federal-funds rate steady at a range of 5.25% to 5.5% since last July.
Officials have been aiming to deliver the US economy a “soft landing” — in which high interest rates tamp down inflation without sparking a recession.
Powell and other members of the committee previously said they needed more confidence inflation is headed toward their goal of 2% before issuing rate cuts.
The Fed’s preferred inflation gauge increased 2.5% in June from the year before, according to Personal Consumption Expenditures (PCE) Price Index data.
Core PCE inflation, which excludes volatile food and energy prices, increased at a 2.6% pace.
Inflation was in rapid decline in 2023 – dropping from an average inflation rate of 8.0% in 2022 to an average inflation rate of 4.1% in 2023, according to the Bureau of Labor Statistics – before ticking back up earlier this year.
Labor costs grew at lower rates than expected, another measure that may persuade the Fed to lower interest rates.
Compensation costs for employees in private and government jobs ticked up 0.9% during the second quarter ending in June, according to the Bureau of Labor Statistics.
The 0.9% nudge was weaker than the 1.0% growth expected by economists surveyed by FactSet.
The small growth was also a turnaround from larger 1.2% gains in the first quarter.
Compensation costs rose at a slower year-to-year rate, climbing 4.1% in the second quarter compared to the 4.2% growth seen in the first quarter. This rise fell below economists’ expectations of 4.3%.
The Bureau of Labor Statistics is expected to report an increase of 175,000 nonfarm payrolls in July, following an increase of 206,000 payrolls in June.
The unemployment rate is expected to stay at 4.1%.
July and August labor market and CPI data will likely impact the Fed’s decision in September, as a slowing job market and tamer inflation could push it to cut rates.
The odds of a quarter-point cut in September are at 88%, while the odds of a half-point cut stand at 12%, according to interest-rate futures market pricing.
Some analysts have suggested the Fed would pursue a series of cuts, according to Barron’s Advisor, with the first interest rate cut in September followed by more in 2025.
Americans have kept their eyes glued to the state of the economy, especially as investors have seen the effects of an already turbulent presidential race — that saw President Joe Biden bow out after a disastrous debate and Vice President Kamala Harris step in — swing stocks back and forth.
Bitcoin shares, for instance, soared after former President Donald Trump was shot in an assassination attempt and left bleeding from the ear.
Cryptocurrency investors bet big on a Trump win again after his speech at the 2024 Bitcoin Conference, since Trump flip-flopped on his crypto policies from 2019 and now appears to support more relaxed industry regulation.
Meanwhile, long-lasting inflation spurred by the pandemic has left consumers hurting. Though it has slowed, consumers have still pulled back on non-necessity spending, like eating out at restaurants and fast-food chains.
Americans were hit with high borrowing rates for home and auto loans and credit cards thanks to the Fed’s series of intense price hikes.
These rate hikes — 11 of them in 2022 and 2023 — were a response to a flare-up in inflation during the spring of 2021 as the economy bounced back from the pandemic-era recession.
Russia’s invasion of Ukraine in early 2022 also pounded the economy, inflating prices for energy and grains.
Economists had predicted the long-term inflation would send the US economy into recession, but the economy has stayed relatively steady — placing more pressure on the Fed to cut rates.
