The Federal Reserve is getting closer to cutting interest rates

The Federal Reserve held interest rates steady Wednesday, but investors are betting that the first rate cut in more than four years could come soon, if inflation continues to moderate.

"Inflation has eased over the past year but remains somewhat elevated," the Fed's rate-setting committee said in a statement . "In recent months, there has been some further progress toward the Committee's 2% inflation objective."

Prices in June were up just 2.5% from a year ago, according to the central bank's preferred inflation yardstick . While that's higher than the Fed's target of 2%, it suggests inflation continues to move in the right direction, clearing the way for the Fed to lower borrowing costs in the near future.

Fed governor Chris Waller hinted at the change in a speech this month titled, "Getting Closer."

"While I don't believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted," Waller told an audience at the Federal Reserve Bank of Kansas City.

For now, Fed policymakers voted unanimously to keep their benchmark rate between 5.25 and 5.5%, where it's been for the last year. That matches the highest level in more than two decades, making it more expensive to get a car loan, finance a business or carry a balance on your credit card.

The Fed is hesitant to wait too long

While Fed officials previously worried that cutting interest rates prematurely might rekindle inflation, they're increasingly confident that price stability is close to being restored. They're also concerned that waiting too long to cut rates could needlessly weaken the job market.

The unemployment rate inched up to 4.1% in June — from a half-century low of 3.4% in 2023. Data for last month will be released on Friday.

"Job gains have moderated, and the unemployment rate has moved up but remains low," Fed policymakers said in their statement.

A cooling job market was evident in a report from the Labor Department Wednesday , showing employers' labor costs are growing more slowly. The cost of wages and benefits rose 4.1% for the twelve months ending in June, compared to 4.5% the previous year.

Moderating labor costs should help to keep a lid on inflation, especially in the labor-intensive service sector.

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