Nick Timiraos, a famous reporter of the Wall Street Journal and known as the "Fed's mouthpiece", wrote an article commenting on the Fed's latest decision, saying that officials kept interest rates stable but made important adjustments, emphasizing the need to pay more equal attention to employment and inflation targets. Here is more content from the article:

Federal Reserve Chairman Jerome Powell said Federal Reserve officials are likely to cut interest rates at their September meeting, moving closer to a new phase of trying to stave off slack in the labor market amid signs that inflation is moving lower.

While Powell and his colleagues did not commit to any such moves when they kept interest rates unchanged on Wednesday, he appeared to suggest in his post-meeting news conference that a rate cut was more likely than no cut.

"The committee's overall sense is that the economy is approaching a point where it would be appropriate to lower the policy rate," Powell said. "That could happen as soon as the next meeting in September."

In a 50-minute news conference that did little to dispel widespread financial market expectations for a rate cut at the next meeting, Powell cited better news on inflation, a desire to prevent a sharp rise in unemployment and his view that Fed policy is beginning to slow economic activity more meaningfully.

While FOMC officials were unanimous in their decision to keep interest rates between 5.25% and 5.5%, a two-decade high, Powell signaled that at least one official would advocate lowering rates at this week’s two-day meeting.

“It’s important because if they were seriously discussing a rate cut in July, then a September cut seems like a done deal unless something crazy happens between now and then,” said Jamie Patton, co-head of global rates at TCW, an asset manager based in Los Angeles.

Investors now expect the Fed to continue cutting rates at its remaining meetings in November and December after the first cut. "What accelerates the rate-cutting cycle is the slack in the labor market, and what slows it down is the stickiness of inflation," said Michael de Pass, global head of rates trading at Citadel Securities.

Officials made two important changes to their policy statement, acknowledging recent progress in fighting inflation and moving more toward lower interest rates without making any explicit commitments.

They saw inflation as “a bit elevated,” a notable downgrade. They stressed that the progress meant they could treat the two aspects of their mandate — low and stable inflation and a strong labor market — on a more equal footing for the first time since they began rapidly raising interest rates two years ago to combat high prices.

The "Committee is focused on both aspects of its dual mandate," the statement said, dropping language that had characterized policymakers as "highly concerned" with inflation risks over the past two years.

The stakes are high for Fed officials, who have been trying to avoid two risks: that they ease policy too soon and cause inflation to become entrenched above their 2% target. Or that they wait too long and cause the economy to collapse under the weight of higher interest rates.

The U.S. economy has been strong so far this year. Gross domestic product, the broadest measure of U.S. economic output, grew at an annualized rate of 2.1% in the first half of the year. While inflation was unexpectedly high in the first quarter, recent data suggest that the slowdown in price growth seen in the second half of last year has resumed and may have widened.

“The picture we’re seeing now is better than last year, when price growth slowed rapidly, but the decline was concentrated in goods rather than services,” Powell said. “But this is a broader disinflation.”

In addition, recent earnings reports show that U.S. companies’ pricing power is declining as consumers tighten their belts to resist steep price increases over the past three years.

McDonald's said sales for the April-June period were down nearly 1% from the same period last year, and issued a warning to the restaurant industry. "Consumers in many markets are very discerning," McDonald's CEO Chris Kempczinski said on an earnings call on Monday.

In 2022, when inflation surged to a four-decade high, Federal Reserve officials raised interest rates at the fastest pace in 40 years. They worried that the rapid rise in prices could cause high inflation to become entrenched throughout the economy, especially if prices and wages rose in tandem.

But recent data suggests that's not happening. In June, there were 1.2 job openings for every unemployed worker, down from a peak of 2 in March 2022 when the Fed began raising interest rates, and back to pre-pandemic levels. Powell said on Wednesday that he no longer sees the labor market as a source of inflation risk. "I don't want to see a substantial further cooling of the labor market," he said.

While layoffs remain low, hiring is also falling. Workers are taking longer to find jobs, and the unemployment rate rose to 4.1% in June from 3.7% at the beginning of the year. Asked if officials are concerned that this could signal more labor market weakness ahead, Powell said: "We're watching this very carefully."

Wage growth is cooling after the end of the pandemic sparked a hiring spree. The Labor Department said Wednesday that private-sector wages and salaries increased 0.8% in the second quarter, the weakest growth so far in 2020.

Some industries most sensitive to higher interest rates are facing added pressure. The number of housing units under construction across the U.S. was expected to level off in 2022 after borrowing costs soared, but residential construction turned negative earlier this year, falling nearly 8% year-over-year in June, the biggest drop since the 2006-2011 housing bust.

Mortgage rates have fallen below 7% in recent weeks, but that has not spurred demand for new mortgages, the Mortgage Bankers Association said Wednesday.

The economy has been more resilient to higher interest rates than most economists expected, in part because many households and businesses locked in low borrowing costs during the pandemic. But the same buffers that weakened the rate pass-through during a rise could also work against the Fed on a fall if it needs to stimulate the economy, TCW’s Patton said.

“That’s why we think the Fed was a little overconfident, thinking that as long as they saw weakness they could ease rates and everything would be fine,” she said. “When weakness showed up in the data the Fed was watching, it was already too late.”

Democrats are seeking to retain control of the White House in November’s election and are frustrated that interest rates have sapped consumer confidence by raising the cost of buying big-ticket items such as homes and cars. They worry that the Fed’s continued wait will undermine what has been a strong labor market.

Others said they were not worried about a severe downturn. “I don’t see a lot of weakness,” said Frank Sorrentino, chief executive of ConnectOne Bank in Englewood Cliffs, New Jersey. While some industries, such as fast food, are slowing, many service-related industries are coming off highs but not slowing, he said.

When the Fed cuts interest rates is not so important to his clients, because medium- and long-term interest rates have already fallen from last year's highs. Sorrentino said: "Yes, if interest rates go down, people will feel better, but whether it is 25, 50 or 100 basis points, I don't think it will have a big impact on business operations. The vast majority of our clients have adapted to this interest rate environment."

Article forwarded from: Jinshi Data