US Fed signals possible rate cut in September: key takeaways from July meeting

US Fed: The US Federal Reserve hinted at a potential rate cut in the coming months, signaling a shift in its monetary policy. After the Federal Open Market Committee (FOMC) meeting on July 31, Fed Chair Jerome Powell expressed optimism about the recent progress in controlling inflation, suggesting that a rate cut could be on the table if economic data continues to improve.

Current Interest Rates Hold Steady

For now, the Fed has decided to maintain its key lending rate within the current range of 5.25-5.50 per cent. Powell acknowledged that predicting the precise timing of a rate cut would be a "very difficult judgement call." Still, he indicated that future long-term rates might be higher than previously anticipated.

Inflation Shows Signs of Easing

Powell highlighted that inflation has moderated, with the Personal Consumption Expenditures (PCE) index—a key measure of consumer prices—showing a 2.5 per cent year-on-year increase in June, down from 2.6 per cent in May. While inflation remains slightly above the Fed’s 2 per cent target, the progress has been welcomed as a positive sign for the economy.

Market Reactions and Economic Impact

Following Powell’s remarks, market expectations shifted towards a possible rate cut in September. Fed funds futures fully priced in a 25-basis-point cut, leading to a drop in Treasury yields by 9 to 11 basis points across the curve. US equities responded positively, with the S&P 500 closing 1.6 per cent higher.
Experts are happy that the meeting has given signals for growing anticipation for a September rate cut. They said such a move could further boost market performance, particularly if no unforeseen economic or geopolitical shocks occur.

US Job Market and Economic Outlook

The US unemployment rate has recently risen to 4.1 per cent, the highest in over two years, which Powell described as an “ongoing gradual normalisation” of the job market. He noted that employment levels have returned to where they were before the pandemic. Despite the slower job growth, Powell expressed confidence in the overall stability of the US economy, supported by expanding economic activity and moderated inflation.