The Federal Reserve held short-term interest rates steady but signaled that inflation is moving closer to its target, potentially paving the way for future rate cuts.
Why it matters: The Fed’s decision and comments suggest that a rate cut could be on the horizon, which would provide relief to borrowers but disadvantage savers.
The details:
- The Federal Open Market Committee maintained language that ongoing concerns about economic conditions remain, but with progress.
- The statement described inflation as “somewhat elevated,” a slight upgrade from the previous “elevated” language.
- Fed Chair Jerome Powell indicated that a rate cut could come as soon as September if economic data shows further easing in inflation.
- The FOMC voted unanimously to keep its benchmark overnight borrowing rate targeted between 5.25%-5.5%, a rate maintained for the past year following 11 increases aimed at curbing inflation.
Despite stringent monetary policy, the economy has continued to expand, with GDP surpassing expectations in the second quarter.
What they’re saying:
- “If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” Powell stated.
- “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the Fed’s statement affirmed.
The other side: Some analysts and investors questioned whether the Fed might act before its September meeting, but most economists deem this unlikely, as the Fed typically reserves emergency action for broader risks to the financial system or the economy.
What’s next: The Fed remains data-dependent and committed to its aggressive stance, but recent economic data indicating lessening price pressures and concerns about the economy facing high borrowing costs could influence future rate decisions.
Full story
The ongoing debate on Fed policy is focused on whether the Fed should cut inter-meetings or in September, and by how much.
It needs to go beyond this and also focus on the opportunity Chair Powell has at Jackson Hall to regain control of the narrative and anchor forward policy…— Mohamed A. El-Erian (@elerianm) August 6, 2024
The Federal Reserve held interest rates steady on Wednesday but noted progress on lowering inflation, potentially paving the way for future rate cuts. In its post-meeting statement, the Fed remarked that risks to achieving its employment and inflation goals are moving into better balance, with inflation easing over the past year but remaining somewhat elevated. Fed Chair Jerome Powell suggested that a rate cut could come as soon as September if economic data shows further easing in inflation.
From this morning’s @opinion article (link below) on why “The Fed Should Resist Placating Markets.”https://t.co/6feK9zwIXG#economy #markets #FederalReserve #investing #investors #econtwitter pic.twitter.com/eC57EQGN7p
— Mohamed A. El-Erian (@elerianm) August 6, 2024
“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” Powell stated. The Fed’s statement provided an upgrade from the June meeting, describing inflation as “somewhat elevated” instead of simply “elevated.” The committee also dropped the word “highly” from its stance on being attentive to risks, reflecting a softened but still cautious approach. Recent economic data indicates that price pressures have lessened from their peak in mid-2022, with the Fed’s preferred inflation measure moderating.
Here's a look at the first Fed rate cut in prior cycles and forward S&P 500 returns. As we saw in 2001 and 2007 with the Fed cutting rates because of an oncoming recession, rate cuts are not necessarily the bullish signal that many claim them to be. pic.twitter.com/jhL9uNmQb5
— Charlie Bilello (@charliebilello) August 5, 2024
Inflation moderates, rate cuts possible
However, the economy has continued to expand, with GDP surpassing expectations in the second quarter. The labor market, while less robust, still indicates near full employment.
The Fed noted that unemployment has moved up but remains low.
Jeremy Siegel saying the Fed should do a 75 bps emergency rate cut today and "another 75 bps cut indicated at the September meeting – and that's a minimum. The Fed Funds rate right now should be somewhere between 3.5 and 4%." pic.twitter.com/88pLQDb3of
— Charlie Bilello (@charliebilello) August 5, 2024
An ADP payroll report showed a potential softening in the labor market, but also contained positive news on inflation, with wages increasing at their slowest pace in three years. Fed officials remain committed to their aggressive stance despite signs of weakening inflation and concerns about the economy facing high borrowing costs.
A report showing a surge in pending home sales in June strengthened their position. Overall, the Fed’s decision to hold rates steady while acknowledging progress on inflation sets the stage for potential rate cuts in the coming months, depending on the trajectory of economic data.
- CNBC.”Fed holds rates steady and notes progress on inflation”.
- CBSNews.”What the Federal Reserve is likely to do after stock selloff”.
- APNews.”Fed Chair Powell says September interest rate cut could be ‘on the table’ as inflation cools”.