The Federal Reserve held interest rates steady on Wednesday but opened the door to reducing borrowing costs as soon as its next meeting in September as inflation continues coming into line with the US central bank’s 2% target.
“There has been some further progress towards the Committee’s 2% objective,” the central bank’s Federal Open Market Committee said in a statement at the end of a two-day policy meeting in which it kept its benchmark overnight interest rate in the 5.25%-5.50% range, but also set the stage for a cut at its Sept. 17-18 meeting, just seven weeks shy of the Nov. 5 U.S. elections.
While Fed officials are wary of any actions that could mar their data-not-politics approach to setting monetary policy, the steady drop in inflation in recent months prompted a broad consensus that the inflation battle was near an end.
Inflation, the Fed said, was now just “somewhat elevated,” a key downgrade from the assessment that it has used throughout much of its battle against rising prices that it was “elevated.”
US stocks trimmed gains following the release of the policy statement while the US dollar, opens new tab pared losses against a basket of currencies. US. Treasury yields also pared declines.
Traders kept bets that the Fed will start dialing back on its restrictive policy in September, with rate-futures pricing reflecting expectations the first move will be a 25-basis-point cut, followed by two more such reductions at the meetings in November and December.
“This was a baby step on the way to a September rate cut,” said Omair Sharif, president of Inflation Insights. “I expect that further good news on the inflation front in July should set up … (Powell) to deliver a more meaningful signal that a rate cut in September is very likely.”
The central bank uses the personal consumption expenditures price index for its 2% annual inflation target.
The PCE price index rose 2.5% in June after exceeding 7% in 2022.
