Although the Federal Reserve on Wednesday left its benchmark interest rate unchanged, as widely expected, Chair Jerome Powell said the "time is drawing near" for the central bank to begin trimming borrowing costs. That could occur as soon as the Fed's next policy meeting in September, assuming economic data continues to show cooling inflation, he added.
Members of the Federal Open Market Committee, the central bank's rate-setting panel, said in a policy statement on Wednesday they will hold the federal funds rate in a range of 5.25% to 5.5%, leaving it at its highest level in 23 years.
The Fed's announcement, which was widely expected by investors, means the federal funds rate has been parked at that level since July 2023, when the central bank last raised rates.
The statement included a few important changes in the Fed's outlook. For one, the Fed described inflation as "somewhat elevated," a more moderate description than its June characterization as simply "elevated." And it stressed its mandate to focus on full employment, as well as taming inflation. Those changes were underscored by Powell, who stressed that the Fed has been pleased by recent data showing a slowdown on prices.
The time for a rate cut "is approaching, and if we do get the data we hope we get, then reduction of our policy rate could be on the table at our September meeting," Powell told reporters at a press conference following a two-day meeting on monetary policy.
Prior to Wednesday's statement, about 9 in 10 economists had penciled in the September meeting for the Fed's first interest rate cut since 2020, pointing to inflation that is easing faster than expected. But Powell stressed that the decision will depend on forthcoming inflation data, and he sidestepped a question on whether there might be additional rate cuts in 2024.
"You would think, base case, that policy rates would move down from here, but I don't want to give specific guidance on the pace of when that would happen," he noted.
Some Wall Street analysts still forecast multiple rate cuts in 2024, which they predict will kick off with the September meeting. Earlier this year, the Fed had projected just one reduction this year.
"As expected, the Fed is setting the table for interest rate cuts starting at their next meeting in September," said Ryan Detrick, chief market strategist at Carson Group, in an email. "The reality is inflation is slowing and the Fed doesn't need rates this high anymore."
Labor market concerns
A growing concern is the nation's labor market, which is showing signs of fading. Job growth has slowed to an average 177,000 a month for the past three months, compared with a three-month average of 275,000 a year ago.
The July jobs report will be released on Friday, with economists forecasting payroll gains of 175,000 this month and the unemployment rate holding steady at 4.1%, according to financial data service FactSet.
Fed officials have said they are seeking to balance the need to keep rates high enough to quash inflation with avoiding a recession. The Fed's dual mandate is to keep prices stable to ensure maximum employment.
"We look at the two goals, and if one of them is farther away than the other, you concentrate on the one that is farther away," Powell said. "For the last couple of hears the best service we could do for the American people was to focus on inflation."
He added, "But now, labor market has softened, the inflation is probably a little farther from its target than employment, but the risks to the employment mandate are real now."
Rate cuts before the election?
Powell was asked by CBS News' Jo Ling Kent about the timing of rate cuts, given that a September cut would occur two months before the U.S. presidential election. Former President Donald Trump recently told Bloomberg News the Fed should refrain from easing rates shortly before voters head to the polls.
But Powell stressed that the Fed is a non-political agency, with a mandate from Congress to focus on maintaining price stability and full employment. The FOMC's discussions focus "strictly" on economic data, he added.
"We never use our tools to support any political outcome," Powell said. "If we stick to our part, that will benefit all Americans — if we get it right, we will have price stability, people will find jobs. Everyone will benefit."
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