The Federal Reserve has decided to keep interest rates steady at 5.25% – 5.50%.
Fed Chair Jerome Powell recognized the recent reduction in inflationary pressures, pointing out that the June Consumer Price Index (CPI) reflected a drop in food and energy prices. However, he stressed that the Fed’s main objective is to ensure long-term price stability. Powell also noted the strength of the labor market and the continued growth of economic activity.
The Federal Reserve states it is now attentive to risks on both sides of its dual mandate, a shift from June when it indicated a strong focus on inflation risks.
The Fed notes that recent progress toward the 2% inflation target has been ‘somewhat’ further compared to the ‘modest’ progress reported in June.
The Fed mentions that risks associated with achieving employment and inflation targets have improved, now described as moving ‘into’ better balance, whereas June’s statement described them as moving ‘toward’ better balance.
The Fed reiterates that it does not anticipate lowering rates until it has more confidence that inflation is sustainably approaching 2%.
The Fed observes that the economy continues to grow at a ‘solid’ pace, job gains have slowed, and while the unemployment rate has increased, it remains low.
The Federal Reserve’s policy decision was reached unanimously.
U.S. Treasury yields trimmed their declines following the Fed’s policy statement, with the 10-year yield decreasing by 1.5 basis points to 4.126%.
The Federal Reserve states that it does not anticipate lowering interest rates until it has greater assurance that inflation is consistently moving towards the 2% target.
Traders expect the Federal Reserve to start easing its policy in September with a 25 basis-point cut, followed by two more cuts in November and December. Before the Fed’s statement, there was an 89% chance of a 25-basis point reduction in September, which has now increased to 95%.
Prediction markets now see an 95% chance of a Fed rate cut in September following today’s Fed decision. Odds for a cut have surged nearly 25 percentage points since July 1. Historically, the Fed has matched market expectations in every meeting since 2009. Despite emphasizing the need for more confidence in inflation trends, the Fed acknowledged recent progress. If a cut occurs, it will be the first since March 2020.
Fed’s Powell: We have made no decisions about future meetings, including September.
Fed’s Powell: There is a broad sense that we are getting closer, but not quite at that point yet.
Fed’s Powell: A rate cut could be on the table in September.
Fed’s Powell: Reducing too late could unduly weaken the economy.
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