The Federal Reserve has indicated potential plans to decrease interest rates as early as September, following a unanimous decision by US policymakers to maintain the high borrowing costs, which have not been altered for eight consecutive meetings. The likelihood of diminishing the policy rate was discussed during the Federal Open Market Committee (FOMC) session this week, stated Fed chair Jay Powell on Wednesday.
The FOMC alluded to the opportunity to meet its target of 2% through a gradual reduction of inflation. However, they expressed the need for stronger assurance before they are prepared to make the cut. Confidence in the direction of inflation was reinforced after the inflation readings of the second quarters. Powell stated the need for further strength in the data to consolidate this confidence, thus reinforcing market predictions of a potential quarter-point reduction in September.
The need for the Fed to focus solely on inflation was nullified, revealing the shifted emphasis towards the stability of the labour market. In case of a more pronounced economic downturn, Powell reiterated the central bank’s readiness to react but emphasised its disinterest to make large-scale rate cuts.
The FOMC noted its alertness towards risks associated with its mandate, asserting that inflation was not its prime concern, but the increasing unemployment rate was taking precedence in defining its policy path.
In the Fed’s upcoming meeting in September, it is forecasted to reduce its benchmark interest rate a quarter point from the current 5.25-5.5%, making it the last meeting before the country’s presidential election in November.
Donald Trump, the Republican presidential aspirant, recently discouraged Powell from slashing the rates prior to the November election, stating that Powell’s tenure as Fed chair would be secure if he took up “the right actions”.
Yet Powell reassured the press on Wednesday that critical tools would not be employed to serve or oppose any political party, politician or political outcome. Short-term Treasury yields dipped amid Powell’s speech, causing a slight escalation in the odds for the central bank to execute three cuts by December, as investors marginally increased their bets on rate cuts occurring within this year. The futures market is still wagering between two and three cuts, starting with the first anticipated cut in September.
The yield on the two-year Treasury bond, reflecting projections for interest rates, has nudged lower, dropping 0.01 percentage points to 4.35 per cent. The prestigious S&P 500 and the tech-centric Nasdaq have both seen a positive uplift in their overall value during the course of the day.
Ever since reaching unprecedented highs in the aftermath of the global pandemic, inflation has consistently been moving downwards towards the target set by the central bank. The benchmark for inflation preferred by the Federal Reserve, which relies on the core index of personal consumption expenditures, now stands at 2.6 per cent, a significant drop from its height of over 5 per cent in 2022.
According to new data released Wednesday, the US job market has shown signs of slowing down from its previous rapid growth, with the unemployment rate trending upwards over the recent months to hit 4.1 per cent. Concurrently, wage-driven pressures have also been alleviated.
The primary concern for Federal Reserve officials has pivoted over recent months from controlling escalating inflation to preventing any potential harm to the economy by maintaining exceedingly high rates for an extended period. Predictions as of June indicate most policymakers foresee interest rates dropping to between 4 and 4.25 per cent by the close of the coming year, before further dropping to around 3 per cent by 2026. – Copyright The Financial Times Limited 2024.