“Further progress has been made toward the Committee’s 2 percent objective,” the Federal Open Market Committee said in a statement at the end of its two-day policy meeting. The committee left its benchmark overnight interest rate unchanged at 5.25% to 5.50% but also set the stage for a rate cut at its Sept. 17-18 meeting, just seven weeks before the Nov. 5 U.S. presidential election.
While Fed officials are wary of any action that could undermine their monetary policy direction, which is based not on data-driven politics, the steady decline in inflation in recent months has led to a broad consensus that the fight against inflation is nearing an end.
The Fed said inflation is currently “moderately elevated,” downgrading its assessment of “inflation is rising” that it has used consistently in its fight against rising prices.
The central bank uses the personal consumption expenditures price index for its 2% annual inflation target. The PCE price index rose 2.5% in June after exceeding 7% in 2022. Additionally, the Fed removed boilerplate language that it is “very attentive to inflation risks” and replaced it with language acknowledging that policymakers are now “mindful of risks on both sides of our dual mandate, which includes our mandate from Congress to maintain maximum employment consistent with stable prices.” The US central bank has said that, given the time it takes for monetary policy to affect the economy, it would be appropriate to lower borrowing costs before inflation actually returns to its target. So far, the economy “continues to expand at a solid pace,” the Fed said in its latest policy statement, noting that the unemployment rate “remains low,” although “employment gains have moderated.”
But unemployment has been rising, and policymakers have recently focused on avoiding a spike in unemployment that would come with high interest rates and slowing inflation.
In its statement, the Fed did not commit to a rate cut in September, reiterating that policymakers need to “gain greater confidence that inflation is sustainably moving toward 2 percent” before lowering borrowing costs.
But the change in statement seems consistent with investors hoping that confidence will be achieved by September.The Fed has been raising interest rates aggressively from March 2022 through July 2023, raising its policy rate by 5.25 percentage points to combat the worst inflationary outburst in 40 years.
Fed Chairman Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EDT (18:30 p.m. GMT) to detail the central bank’s latest statements and outlook for the economy and interest rates.
The new policy statement was approved unanimously.
