The Federal Reserve held interest rates steady Wednesday but hinted that the central bank is drawing nearer to a cut as it cited “some further” progress toward its goal of getting inflation to 2%.
Fed officials voted to keep their benchmark interest rate in a range of 5.25%-5.50%, a 23-year high. The decision was unanimous.
The fed funds rate has been in this range since last July as part of the Fed’s aggressive campaign to tamp down inflation that ballooned during the pandemic.
But Fed officials hinted they are inching closer to the confidence needed to lower rates as inflation continues to cool and the job market slows, making a cut at its next meeting on Sept. 17-18 increasingly likely.
“In recent months there has been some further progress towards the Committee’s 2% inflation objective,” officials from the Fed’s Federal Open Market Committee said in their policy statement released Wednesday.
That marked a change from the “modest further progress” cited in a prior statement released at the Fed’s last meeting in June.
Another sign that a cut could be nearing came when policymakers noted that the risks to both sides of their dual mandate — price stability and full employment — “continue to move into better balance.”
That was a change from “moved toward better balance.”
Officials did maintain some cautious language in their policy statement, stating that “the Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
They also said characterized inflation as “somewhat” elevated even as they reiterated it had eased over the past year.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
The language changes made to the statement Wednesday come after some key Fed officials emphasized in the weeks leading up to Wednesday’s meeting that they were getting closer to having confidence inflation was sustainably dropping to their 2% goal.
That confidence had slipped somewhat following hotter-than-expected inflation readings in the first quarter. But three straight months of better data have restored some optimism.
The latest reassurance came last Friday when a new reading of the Fed’s preferred inflation gauge — the core Personal Consumption Expenditures (PCE) index — showed its lowest annual gain in more than three years.
The 2.6% annual increase in the month of June was the same level as May and down from 2.8% in April. On a three-month annualized rate, core PCE dropped back to 2.3% from 2.9%.
Another inflation measure, the Consumer Price Index (CPI), has also shown progress.
On a “core” basis — which excludes volatile food and energy prices the Fed can’t control — CPI rose 3.3% year over year in the month of June. That was down from 3.4% in May and 3.6% in April.
Fed officials have also been making it clear they are paying more attention to a slowing job market, another sign that cuts were likely nearing.
The unemployment rate has ticked up for two consecutive months to 4.1% — above where some Fed officials predicted the rate would be at the end of this year.
Fed officials in their policy statement released Wednesday noted that job gains have moderated. While the unemployment rate has moved higher, they said, it remains “low.”
Most Fed watchers in the runup to Wednesday’s meeting said the central bank still needed just a bit more time to be sure about cuts, while also preparing the markets for the significant action to come.
In fact, some Fed officials have indicated they need more than one quarter’s worth of good data to know for sure that inflation is traveling in the right direction. They may want to see what the July and August readings show first.
Read more: Fed predictions for 2024: What experts say about the possibility of a rate cut
A September rate cut could cause the central bank to face political criticism from both sides of the aisle in Washington.
Lawmakers from both parties have signaled they would criticize the Fed if a decision made at the last meeting before Election Day didn’t go their way.
If Powell and his colleagues choose to keep rates at a 23-year high, a growing chorus of Democratic critics calling for cuts may reach a crescendo.
But if policymakers do indeed cut, Republicans from Donald Trump on down will be sure to cast
the move as caving to election-year pressure.
In an interview with Bloomberg published earlier this month, the Republican nominee again reiterated that central bank officials should not ease monetary policy before the November election.
“It’s something that they know they shouldn’t be doing,” Trump said.
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