The Federal Reserve has said it could start lowering interest rates as soon as September, after US policymakers voted to hold borrowing costs at a 23-year high for the eighth meeting in a row.
“A reduction in our policy rate could be on the table as soon as the next meeting in September,” Fed chair Jay Powell told a press conference on Wednesday, adding that there had been “a real discussion” at the Federal Open Market Committee this week about cutting rates.
The FOMC flagged “further progress” towards lowering inflation to its 2 per cent goal. But it maintained that officials would need even “greater confidence” before they were willing to cut.
“The second quarter’s inflation readings have added to our confidence and more good data would further strengthen that confidence,” Powell said.
The comments mark the clearest sign yet that the central bank is readying a policy pivot more than two years after ramping up its fight against inflation in earnest.
“He’s sending the signal as many ways as possible that unless something dramatic happens between now and September, they will begin cutting rates at that meeting by a quarter point,” said Bob Michele, chief investment officer at JPMorgan Asset Management.
In recognition of newfound concerns over the labour market confronting the Fed, the FOMC said on Wednesday that it was “attentive to the risks to both sides of its dual mandate”, affirming that it no longer viewed inflation as the foremost issue, but rather that a rising unemployment rate was also top of mind as it charts its policy path.
Powell noted that the Fed does not need to see further weakening across the labour market to believe it has a handle on inflation.
“There was a lot of focus in the press conference on dual-sided risks, with lots more from Powell on labour market risks than I have heard in some time,” said Gargi Chaudhuri, chief investment strategist for the Americas at BlackRock.
The Fed’s September meeting, at which it is expected to lower its benchmark interest rate by a quarter point from its current 5.25-5.5 per cent, will be the last one before November’s presidential election.
Donald Trump, the Republican candidate for the presidency, warned Powell recently not to cut rates before November’s election, saying that if elected he would let the Fed chair serve out his term only if he was “doing the right thing”.
“We never use our tools to support or oppose a political party or a politician or any political outcome,” Powell said on Wednesday.
As Powell spoke, short-term Treasury yields dropped, as investors added to bets on rate cuts happening this year. Traders in the futures market are pricing in two or three cuts this year, with the first coming in September, but increased the odds of three cuts by December, putting the chances at 96 per cent.
The two-year Treasury yield, which moves with interest rate expectations, fell 0.1 percentage points to 4.26 per cent, its lowest level since February. The benchmark 10-year yield, which moves with inflation and growth expectations, also fell to its lowest level since February, down 0.11 percentage points to 4.04 per cent.
The blue-chip S&P 500 and the tech-heavy Nasdaq rose, with both recording their best day since February.
After soaring to its highest level in decades after the Covid-19 pandemic, inflation is now declining steadily towards the central bank’s target.
The Fed’s preferred inflation gauge, based on the core personal consumption expenditures price index, is now at 2.6 per cent, having peaked at more than 5 per cent in 2022. Powell said recent data releases pointed to “broader disinflation”.
Growth in the US labour market is also beginning to slow from its earlier red-hot pace, with the unemployment rate rising over the past few months to 4.1 per cent. Wage pressures have also eased, new data on Wednesday showed.
The central bank is trying to pull off a “soft landing”, in which inflation is brought down to target without tipping the economy into a recession.
So far, it appears to be succeeding, with price pressures declining without a sharp jump in lay-offs, as employers reduce hiring instead of cutting existing jobs. Powell on Wednesday said the odds of a hard landing were “low”.
In the event of a more significant downturn, Powell said the central bank would respond, but made clear that it was not considering cutting rates by half-a-percentage point increments.
“If the Fed leaves rates and policy where they are for too long, we risk sliding into a recession. The Fed is aware of that risk,” said JPMorgan’s Michele.
Sam Coffin, an economist at Morgan Stanley, said he expected the Fed to lower rates by a quarter-point at each of its remaining meetings this year as growth in the second half of 2024 slows to 2 per cent. His team believes the central bank will deliver another four cuts in 2025, pulling the policy rate down another percentage point.
Source: Economy - ft.com
