Fed will hold interest rates steady but officials hint rates could be cut this year

The US Federal Reserve announced on Wednesday it will hold interest rates steady, though officials hinted at optimism that rates could be cut later this year.

Interest rates are set by the Fed’s federal open market committee (FOMC), which meets eight times a year and will next meet in September.

The Fed was largely expected to keep interest rates steady this meeting, but investors are looking closely for hints that rate cuts could come as early as the Fed’s next meeting.

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In a Wednesday press conference, Fed chair Jerome Powell expressed a tone of cautious optimism. He said “we’re getting closer to the point” where the Fed could lower interest rates, “but we’re not quite at that point yet”.

Powell said if inflation moves down quickly or in line with expectation, “a rate cut could be on the table at the September meeting”.

But, he said: “If inflation were to prove stickier, and we were seeing higher rates of inflation and disappointed readings, we would weigh that along with other things.”

He said that the “last couple of readings have added to confidence” that inflation is moving down towards the Fed’s target of 2%. Meanwhile, the labor market made “a move from over-heated to more normal conditions”.

Powell said: “We think we don’t need to be 100% focused on inflation because of the progress that we’ve made.”

Rates have held steady at a two-decade high of 5.25% to 5.5% over the past year. The Fed last raised interest rates in July last year, the 11th time it had hiked rates. Rates were at near zero during the early pandemic, from 2020 to early 2022.

The Fed has been trying to balance its “dual mandate” of cooling inflation, which peaked at 9.1% in the summer of 2022, with minimal damage to the labor market. The unemployment rate in June rose slightly to 4.1%, the highest it had been since late 2021.

Though Fed officials have not explicitly said the central bank will cut rates at their next meeting in mid-September, investors have expected that cuts could start if inflation remains cool.

Hints often show up in small changes in the Fed’s press release after the FOMC meeting. This time around, Fed officials seem to suggest they are paying more attention to keeping the labor market balanced with inflation, rather than being laser-focused on bringing down inflation.

“The economic outlook is uncertain,” the Fed wrote in its press release after last month’s meeting, “and the committee remains highly attentive to inflation risks.”

This month, the Fed said it “is attentive to the risks to both sides of its dual mandate”.

Inflation stood at 3% in June, down from 3.3% in May. The Fed’s target inflation rate is 2%.

The core personal consumption expenditure index, measured by the US commerce department, also showed a cooling in economic activity. The prices of goods and services minus food and fuel, which experience price swings, measured by the index was 2.6% in June, offering another reflection of decreasing prices to the Fed. In comparison, the core index was at 4.3% the same time last year.

Other Fed officials have implied more strongly that they believe cuts could come later this year.

“The time to lower the policy rate is drawing close,” Christopher Waller, a Fed governor, said in remarks on 17 July. “Right now, the labor market is in a sweet spot. We need to keep the labor market in this sweet spot.”