• The Federal Reserve kept interest rates unchanged at the highest level in more than two decades
• Inflation has eased over the past year but remains somewhat elevated
• Investors are betting the Fed will start to lower rates at its next meeting in September if inflation continues to moderate
The Federal Reserve held interest rates steady on Wednesday, but investors are betting that the first rate cut in more than four years could come soon if inflation continues to moderate. The Fed is getting closer to lowering rates to support the economy.
Inflation Moderating From High Levels
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 Signals Rate Cuts Are Getting Closer
Fed governor Chris Waller hinted at the change in a speech this month titled “Getting Closer.” Waller said that while he doesn’t believe the Fed has reached its final destination, he believes the time when a cut in interest rates is warranted is getting closer.
For now, Fed policymakers voted unanimously to keep their benchmark rate between 5.25% and 5.5%, matching the highest level in more than two decades. That makes it more expensive to finance major purchases like homes, cars, and business investments.
Fed Concerned About Waiting Too Long
While Fed officials previously worried that cutting 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.
Moderating Labor Costs Helping Curb Inflation
A cooling job market was evident in a report from the Labor Department on Wednesday showing employers’ labor costs are growing more slowly. The moderating wage growth should help keep a lid on inflation, especially in labor-intensive services.
Conclusion
With inflation continuing to ease, the Federal Reserve is moving closer to cutting interest rates to support the economy. Rate cuts could come as soon as September if the moderation in prices persists. Lower interest rates would make borrowing cheaper for consumers and businesses.
