Author: Amara Omeokwe, Bloomberg; Translated by: Deng Tong, Golden Finance
Federal Reserve Chairman Jerome Powell said the Fed could cut interest rates as early as September after the U.S. central bank voted to keep its benchmark rate at its highest level in more than 20 years.
“The question is whether the overall data, the changing outlook and the balance of risks are consistent with rising confidence in inflation and a solid labor market,” Powell told reporters on Wednesday. “If that criteria is met, we could lower the policy rate as early as our next meeting in September.”
His comments came after the Federal Open Market Committee decided to keep the federal funds rate in a range of 5.25% to 5.5%, where it has been since July of last year.
Policymakers also made several tweaks to the wording of their statement following a two-day meeting in Washington, suggesting they are closer to lowering borrowing costs. Notably, the committee shifted to saying it was “focused on risks to both sides of its dual mandate,” moving away from previous language that focused solely on inflation risks.
"In recent months, the Committee has made some progress toward its 2 percent inflation objective. The Committee judges that risks to the achievement of its employment and inflation objectives will continue to be balanced," the FOMC statement said.
Officials also tempered their assessment of the labor market, noting that job gains had slowed and the unemployment rate had risen but remained low. They said inflation had eased over the past year but remained “modestly elevated.”
Still, policymakers said they believed it would be inappropriate to cut borrowing costs until they had “greater confidence” that inflation was moving sustainably toward their target.
Two-year Treasury yields fell and the S&P 500 was up on the day, while the dollar remained lower.Expectations for a quarter-point rate cut in September remain above outright expectations, according to futures markets, meaning investors think the cut could be bigger.
However, when asked at a press conference about the prospect of a half-percentage point rate cut, Powell said at a press conference that "it is not something we are considering right now."
The change in the statement solidifies a shift in tone from several policymakers, including Powell, who recognize the growing risks facing the labor market. It could also bolster expectations among economists and investors for a rate cut at the central bank’s Sept. 17-18 meeting.
Powell told reporters he could "envision anywhere from zero to multiple rate cuts over the remainder of the year," depending on how the economy evolves.
The Fed chairman also said there was "a real discussion about what action to take at this meeting," adding that there was "overwhelming support for no action at this meeting."
Balancing risks
After more than two years of focusing too much on its mandate to maintain price stability, officials have increasingly emphasized the Fed’s responsibility to promote maximum employment. They now see the risks to achieving both goals as more balanced.
Powell emphasized that theme at his press conference, arguing that the risk of a surprise increase in inflation has declined as the labor market has cooled, while downside risks to the labor market "are now real."
While the job market remains generally solid, the unemployment rate has risen in each of the past three months, reaching 4.1% in June, the highest level so far in 2021.
In addition, hiring has slowed and become more concentrated in a few industries, and the ratio of job openings to unemployed workers has returned to 2019 levels.
The trend has led some Federal Reserve policymakers to warn that a further slowdown in the labor market could lead to higher unemployment, an outcome the Fed wants to avoid.
The U.S. economy has remained remarkably resilient against a backdrop of high interest rates, maintaining a solid pace of growth on the back of healthy consumer spending. That resilience is key to hopes that the central bank can tame inflation without triggering a recession.
Recent inflation data has also been more encouraging, having resumed its downward trend and approaching the central bank’s 2% target. Powell previously noted that these data “provide some confidence” that inflation will continue to cool.
The Fed’s preferred measure of underlying inflation rose a modest 0.2% in June and is 2.6% higher than a year ago.
Several former Fed officials and economists, including former Fed Vice Chairman Alan Blinder and former New York Fed President William Dudley, urged the Fed to cut interest rates at the meeting.