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Published 06:29 IST, August 1st 2024

Jerome Powell hints at potential rate cut in September amid economic stability

The Federal Reserve concluded its latest two-day policy meeting with a decision to maintain its benchmark interest rate in the 5.25 to 5.50% range.

Reported by: Business Desk
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Jerome Powell
Jerome Powell | Image: Republic

Interest rate unchanged: Federal Reserve Chair Jerome Powell indicated on Wednesday that interest rates could be reduced as early as September if the US economy continues on its projected course. This move would bring the central bank's prolonged effort to combat inflation closer to an end while intersecting with the nation's presidential election campaign.

The Federal Reserve concluded its latest two-day policy meeting with a decision to maintain its benchmark interest rate in the 5.25 to 5.50 per cent range, which was established a year ago. The statement from the meeting softened its description of inflation and noted that the risks to employment were now equivalent to those of rising prices, using neutral language that suggests a potential for future rate cuts after more than two years of tightening credit.

Powell highlighted this point in his post-meeting press conference, stating that price pressures were easing broadly across the economy, which he termed "quality" disinflation. He noted that if upcoming data aligns with expectations, support for cutting rates would increase.

"If we were to see inflation moving down more or less in line with expectations, growth remains reasonably strong, and the labour market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting," Powell said.

In a July hearing, Republican lawmakers warned Powell that a rate cut at the September 17-18 meeting, seven weeks before the US elections, could be perceived as a politicised move. They highlighted progress on inflation and the potential benefits of cheaper credit and home mortgages.

Powell, responding to a question on Wednesday, asserted that the central bank's considerations are solely based on the state and direction of the economy and the progress of inflation towards its 2 per cent annual target, not the political calendar or any party's prospects.

"This is how we think about it. This is what we do," Powell said.

Powell also mentioned that some Fed policymakers had considered the logic of cutting rates at this session. However, "the sense of the (policy-setting) committee was not at this meeting, but as soon as the next meeting depending on how the data come in."

Setting the Stage

Powell's remarks confirmed investors' expectations that the Fed would pivot in September from a period of restrictive interest rates to a steady easing of credit policy. This shift aims to achieve a 2 per cent inflation target without significantly harming the labour market.

Powell expressed confidence in a "soft landing," with data not indicating a weak or overheating economy. The Fed's new policy statement reflected this optimism, noting "further progress toward the (Federal Open Market) Committee's 2 per cent objective" and maintaining a low unemployment rate of 4.1 per cent.

The central bank targets a 2 per cent inflation rate using the personal consumption expenditures (PCE) price index. The PCE price index rose 2.5 per cent in June after exceeding 7 per cent in 2022, with recent month-to-month readings showing it even closer to the target.

Investors interpreted Powell's comments as clearly preparing for a reduction in borrowing costs at the Fed's September meeting.

"Listening to him speak, it's clear they're all locked and loaded for a September rate cut and they're going to maintain their optionality," said Mark Malek, chief investment officer at SiebertNXT.

Interest rate futures, stocks, and Treasury bonds all rallied significantly following Powell's remarks. The probability of a first cut in September being as large as half a percentage point rose to about 13 per cent from about 5 per cent before he began speaking, according to CME Group's FedWatch tool. Powell, however, noted that a 50-basis-point cut was not actively considered.

While Fed officials are cautious about actions that could compromise their data-not-politics approach to setting monetary policy, the steady decline in inflation in recent months has fostered a broad consensus that the inflation battle is nearing its conclusion.

Inflation is now considered "somewhat elevated," a downgrade from the nearly three-year assessment of being "elevated." The Fed's policy statement also replaced the language about being "highly attentive to inflation risks" with a focus on the "risks to both sides of its dual mandate," which includes maintaining maximum employment consistent with stable prices.

So far, the economy "has continued to expand at a solid pace," according to the Fed's statement. While "job gains have moderated," the unemployment rate "remains low." However, the rising jobless rate has shifted policymakers' focus towards avoiding a sharp increase in unemployment often associated with high interest rates and slowing inflation.

(With Reuters inputs)

Updated 06:29 IST, August 1st 2024