By —
Christopher Rugaber, Associated Press Christopher Rugaber, Associated Press
Economy
WASHINGTON (AP) — The Federal Reserve said Wednesday that greater progress has been made in reducing inflation to its 2 percent target, a sign that the central bank is moving closer toward cutting its key interest rate for the first time in four years.
Watch Powell’s remarks in the player above.
In a statement issued after it concluded its two-day meeting, the Fed also said that “job gains have moderated” and acknowledged that the unemployment rate has risen. The Fed is required by Congress to pursue stable prices and maximum employment, and the statement said the central bank is “attentive to the risks” to both goals, a major shift after several years of focusing exclusively on combatting inflation.
A greater focus on the employment half of the Fed’s mandate, along with cooling inflation, would support the case for a rate cut in the coming months.
Fed policymakers also chose to keep their key rate at a 23-year high of 5.3 percent, even as many Democratic elected officials and some economists have pushed for lower rates to bolster the economy and prevent job cuts. Republicans, including former President Donald Trump, have argued that a rate cut before the election would appear politically motivated.
At a news conference Wednesday, Fed Chair Jerome Powell said that if inflation continued to cool, “a rate cut could be on the table in the September meeting.”
“We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate,” Powell said, “but we’re not quite at that point.”
Before the Fed’s decision, financial market traders had priced in 100 percent odds that the central bank will reduce its benchmark rate at its Sept. 17-18 meeting, according to futures markets. The Fed typically seeks to avoid surprising investors with its rate decisions.
Stocks added a bit to earlier gains and Treasury yields eased after the Federal Reserve held its main interest rate at a two-decade high but gave some indication that an easing may soon be on the way. The S&P 500 was up 2 percent around 3:10 p.m. ET.
The Fed is seeking to strike a delicate balance: It wants to keep rates high enough for long enough to quell inflation, which has fallen to 2.5 percent from a peak two years ago of 7.1 percent, according to its preferred measure. But it also wants to avoid keeping borrowing costs so high that it triggers a recession. So far, it is on track for a so-called “soft landing,” in which inflation falls to 2 percent without a recession.
Yet with the unemployment rate ticking higher for three months in a row, some economists have raised concerns that the Fed should have cut rates Wednesday or should cut them more quickly later this year.
“The finish line is in sight and it would be tragic for the Fed to stumble and fall, with one-tenth of a mile left in the marathon, which is what I think they would be doing if they don’t start cutting,” Bharat Ramamurti, an advisor at the American Economic Liberties Project and former economist in the Biden White House, said on a call with reporters.
Also Wednesday, three Democratic senators, led by Elizabeth Warren from Massachusetts, urged Powell in a letter to cut rates. The letter charged that a failure to reduce borrowing costs soon would suggest the Fed is “giving in to bullying” and would itself be a political move.
In the latest piece of good news on price increases, last Friday the government said that yearly inflation fell to 2.5 percent in July, according to the Fed’s preferred inflation measure. That is down from 2.6 percent the previous month and the lowest since February 2021, when inflation was just starting to accelerate.
At the same time, the unemployment rate has risen by nearly a half-percentage point this year to a still-low 4.1 percent and hiring has slowed. Powell and other Fed officials have highlighted they are increasingly focused on the risk that the job market could falter, another reason markets expect rate cuts soon.
The government will issue the latest jobs numbers this Friday, and economists forecast that it will say employers added 175,000 jobs in July, while the unemployment rate remained 4.1 percent.
