The US Federal Reserve announced on Wednesday it will hold interest rates steady, though officials hinted at optimism that rates could be cut later this year.
Interest rates are set by the Fed’s Federal Open Market Committee (FOMC), which meets eight times a year and will next meet in September.
The Fed was largely expected to keep interest rates steady this meeting, but investors are looking closely for hints that rate cuts could come as early as the Fed’s next meeting.
Rates have held steady at a two-decades high of 5.25% to 5.5% over the last year. The Fed last raised interest rates in July 2023, the 1th time it had hiked rates. Rates were at near zero during the early pandemic, from 2020 to early 2022.
The Fed has been trying to balance its “dual mandate” of cooling inflation, which peaked at 9.1% in summer 2022, with minimal damage to the labor market. The unemployment rate in June rose slightly to 4.1%, the highest it had been since late 2021.
Though Fed officials have not explicitly said the central bank will cut rates at their next meeting in mid-September, investors have expected that cuts could start if inflation remains cool.
Hints often show up in small changes in the Fed’s press release after the FOMC meeting. This time around, Fed officials seem to suggest they are paying more attention to keeping the labor market balanced with inflation, rather than being laser-focused on bringing down inflation.
“The economic outlook is uncertain,” the Fed wrote in its press release after last months’s meeting, “and the Committee remains highly attentive to inflation risks.”
This month, the Fed instead wrote “is attentive to the risks to both sides of its dual mandate”.
Inflation stood at 3% in June, down from 3.3% in May. The Fed’s target inflation rate is 2%.
The core personal consumption expenditure index, measured by the US commerce department, also showed a cooling in economic activity. The prices of goods and services minus food and fuel, which experience price swings, measured by the index was 2.6% in June, offering another reflection of decreasing prices to the Fed. In comparison, the core index was at 4.3% the same time last year
In his latest comments before the meeting, the Fed chair, Jerome Powell, said that data on consumer prices “do add somewhat to confidence” that inflation is returning to the Fed’s target. But, he reiterated, “we’re going to be making these decisions meeting by meeting”.
Other Fed officials have implied more strongly that they believe cuts could come later this year.
“The time to lower the policy rate is drawing close,” Christopher Waller, a Fed governor, said in remarks on 17 July. “Right now, the labor market is in a sweet spot. We need to keep the labor market in this sweet spot.”