Rates Are Held Steady by the Fed and Inflation is Progressing

Federal Reserve officials maintained short-term interest rates on Wednesday but indicated that inflation is nearing its target, potentially paving the way for future rate cuts.

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However, the central bankers did not explicitly suggest that a rate reduction is imminent. They continued to express concerns about economic conditions while acknowledging some progress. They also emphasized that more improvement is needed before considering rate cuts.

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"The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance," stated the Federal Open Market Committee (FOMC) in its post-meeting announcement, marking a slight upgrade from previous language.

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"Inflation has eased over the past year but remains somewhat elevated," the statement continued. "In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective."

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Speaking to the media, Chair Jerome Powell noted that no decisions have been made regarding future meetings, but a rate cut could be possible in September if economic data shows continued inflation easing.

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"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 said.

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Investors had been anticipating signals that the Fed would lower rates in its September meeting, with futures markets expecting further cuts in November and December, assuming quarter-percentage-point reductions. Stocks rallied to their highest levels of the day following Powell's comments.

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The Fed's statement reflected an upgrade from the June meeting, which mentioned only "modest" progress in reducing price pressures that had been at their highest levels since the early 1980s. The previous statement described inflation as "elevated," while the latest one labeled it as "somewhat elevated."

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The FOMC unanimously voted to keep its benchmark overnight borrowing rate between 5.25% and 5.5%, the highest in 23 years, maintained over the past year through 11 increases aimed at curbing inflation.

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One notable change in the statement was that committee members are now "attentive" to the risks associated with both full employment and low inflation, removing the word "highly" from the June statement.

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Nevertheless, the statement retained a crucial sentence regarding the Fed's stance: "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."

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This phrase underscores the Fed’s data-dependent approach. Officials assert that they are not following a predetermined path for rates and will not be guided solely by forecasts.

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Recent economic data indicates that price pressures have significantly eased from their peak in mid-2022, when inflation was at its highest level since the early 1980s.

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The Fed’s preferred inflation gauge, the personal consumption expenditures price index, shows inflation at around 2.5% annually, although other measures suggest slightly higher levels. The central bank targets a 2% inflation rate and remains committed to this goal despite pressure from some quarters to accept higher levels.

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Despite the Fed's tightest monetary policy in decades, the economy continues to expand. The second-quarter gross domestic product (GDP) grew at an annualized rate of 2.8%, surpassing expectations, driven by consumer and government spending and inventory restocking.

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Labor market data, while somewhat less robust, still shows an unemployment rate of 4.1%, close to what economists consider full employment. The Fed statement noted that unemployment "has moved up but remains low." An ADP report showed July private sector job growth of just 122,000, suggesting a potential weakening in the labor market.

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However, there was some positive inflation data in the ADP report, with wages increasing at their slowest pace in three years. Additionally, the Labor Department reported that wage, benefits, and salary costs rose just 0.9% in the second quarter, below expectations and the 1.2% increase in the first quarter.

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Fed officials have pledged to proceed cautiously, despite signs of weakening inflation and concerns about the economy’s ability to handle the highest borrowing costs in 23 years for much longer. Their cautious stance was reinforced by an economic report showing that pending home sales surged by a remarkable 4.8% in June, defying expectations of a 1% increase.

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