Federal Reserve Holds Rates Steady, Signals Imminent Cut

Federal Reserve officials have decided to keep interest rates at their highest level in over two decades, signaling a potential reduction in borrowing costs as inflation eases and the labor market cools. The Federal Open Market Committee (FOMC) unanimously voted to maintain the benchmark federal funds rate within the 5.25% to 5.5% range, a level sustained since last July.

Real-Time Market Reactions

Follow the real-time reactions on Bloomberg’s TOPLive blog for immediate insights and market responses. Investors and economists closely monitored the Fed’s latest moves and statement language adjustments following their two-day meeting in Washington.

New Statement Language Reflects Dual Mandate

Policymakers made several notable changes to the language in their post-meeting statement. The committee shifted its focus to being “attentive to the risks to both sides of its dual mandate” rather than focusing solely on inflation risks. “Recent months have seen further progress toward the committee’s 2% inflation objective,” the statement read. “The committee judges that the risks to achieving its employment and inflation goals continue to move into better balance.”

Labor Market and Inflation Dynamics

Officials offered a tempered assessment of the labor market, acknowledging that job gains had moderated and the unemployment rate had risen but remained low. They also noted that inflation had eased over the past year but continued to be “somewhat elevated.” Despite this progress, policymakers maintained their stance that lowering borrowing costs would not be appropriate. They emphasized that they needed “greater confidence” that inflation is moving sustainably toward their target before considering any rate cuts.

Bank of England Poised for First Rate Cut Since Pandemic

Analysts expect the Bank of England (BOE) to warn investors not to expect consecutive interest rate cuts if policymakers make a first cut in their closely scrutinized decision this week.

Market Reactions

In response to the Fed’s announcement, two-year Treasury yields rose, the S&P 500 index pared gains, and the dollar remained lower. A quarter-point rate reduction is already fully priced in for September. This reflects the market’s anticipation of a near-term rate cut.

Shifting Tone Among Policymakers

The changes in the Fed’s statement underscore a shift in tone among several policymakers, including Chair Jerome Powell, who are now recognizing growing risks to the labor market. This shift is expected to reinforce expectations among economists and investors for a rate cut at the central bank’s Sept. 17-18 meeting. Powell will address the media at a press conference at 2:30 p.m. in Washington to provide further insights.

Balancing Dual Mandates

Federal Reserve officials have increasingly emphasized the central bank’s dual mandate: fostering maximum employment and maintaining price stability. “Elevated inflation is not the only risk we face,” Powell said earlier this month. Although the job market remains robust, the unemployment rate has edged up over the past three months. As of June, it reached 4.1%, marking the highest level since 2021.

Hiring has slowed and become more concentrated in a few industries, and the ratio of job openings to unemployed workers has returned to 2019 levels.

Resilient Economy and Encouraging Inflation Trends

The US economy has shown resilience despite high interest rates. It continues to grow at a solid pace, driven by healthy consumer spending. This resilience has bolstered hopes that the central bank can tame inflation without triggering an economic downturn. Recent inflation figures have been encouraging, showing a downward trend toward the Fed’s 2% target. Powell noted that these figures added “somewhat to confidence” that inflation would continue to cool. The Fed’s preferred measure of underlying inflation rose a modest 0.2% in June and 2.6% from a year earlier.

Calls for Rate Cuts

Several former Fed officials and economists, including former Fed Vice Chair Alan Blinder, had urged the Fed to cut rates at this meeting. Former New York Federal Reserve President William Dudley also supported this recommendation. However, the current stance indicates a more cautious approach, awaiting stronger evidence of sustained inflation control before making further moves.

Delve into the ever-evolving realm of finance with subscriptions to WSJ and Barron’s. Get your initial WSJ Print issue within three days, and access digital content in just 24 hours. Personalize your experience, adjust delivery addresses, and deepen your financial knowledge with Barron’s weekly comprehensive analysis. Stay at the forefront of finance with the combined expertise of WSJ and Barron’s.