WASHINGTON – Federal Reserve officials kept short-term interest rates steady on Wednesday but said inflation is moving closer to target, which could open the door to future rate cuts.
However, central bankers stopped short of explicitly signaling that a rate cut was imminent, choosing instead to maintain the language of continued concerns about economic conditions despite progress. They also maintained a statement that more progress was needed before cutting rates.
“The Committee determines that risks to achieving its employment and inflation goals continue to be more balanced,” the FOMC said in a statement after the meeting, a slight upgrade from its previous language.
“Inflation has eased over the past year but remains at elevated levels,” the statement continued. “In recent months, some further progress has been made towards the Committee’s 2 percent inflation target.”
The language also represented an upgrade from the June meeting, when the policy statement said only “modest” progress had been made in reducing price pressures, which two years ago had been at their highest levels since the early 1980s. The previous statement also described inflation as “higher” rather than “somewhat higher.”
Among other adjustments, the Federal Open Market Committee (FOMC) voted unanimously to keep its benchmark overnight borrowing rate target between 5.25% and 5.5%. The rate, the highest in 23 years, has been in place for the past year and is the result of 11 rate hikes aimed at reducing inflation.
One of the changes noted that committee members were “concerned” about risks to both sides of its full employment and low-inflation mandate, and removed the word “high” from the June statement.
The market has been looking for signs that the Federal Reserve will cut interest rates at its next meeting in September. Assuming a 25 percentage point cut, futures are pricing in further cuts at the November and December meetings. Stocks rose after the committee’s decision was announced.
However, the statement left intact a key sentence about the Fed’s intentions: “The Committee believes it would be appropriate to lower the target range until there is greater confidence that inflation will continue to move toward 2 percent.”
This sentence highlights the Fed’s reliance on data. Officials insist their rates are not on a predetermined course and are not guided by forecasts. Investors may look for more clues at Federal Reserve Chairman Jerome Powell’s press conference at 2:30 p.m. ET.
Recent economic data suggests price pressures are well below their peak in mid-2022, when inflation reached its highest level since the early 1980s.
The Fed’s preferred measure, the personal consumption expenditures price index, shows inflation at about 2.5% annually, but other indicators show slightly higher readings. The Fed has set an inflation target of 2% and is sticking to that target despite pressure from some quarters to tolerate higher levels.
The economy continues to expand even as the Federal Reserve maintains its tightest monetary policy in decades.
Driven by consumer and government spending and inventory replenishment, gross domestic product grew at an annualized rate of 2.8% in the second quarter, well above expectations.
Labor market data was slightly softer, although the 4.1% unemployment rate was far from what economists consider full employment. The Fed’s statement noted that the unemployment rate “has increased but remains low.” On Wednesday, data from employment processing firm ADP showed that private sector employment grew by just 122,000 jobs in July, indicating that the labor market may be softening.
However, there was some positive inflation data in the ADP report, with wages growing at the slowest pace in three years. Also on Wednesday, the Labor Department reported that wages, benefits and salary costs rose just 0.9% in the second quarter, below expectations and the 1.2% level in the first quarter.
Fed officials vowed to proceed with caution despite signs that inflation is easing and concerns that the economy will not be able to sustain borrowing costs that are the highest in about 23 years for much longer. Their stance gained some strength Wednesday when another economic report showed that pending home sales surged a stunning 4.8% in June, beating expectations for a 1% increase.
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