The Federal Reserve held interest rates steady Wednesday but hinted that it is nearer to easing monetary policy as it cited "some further" progress on inflation and Fed Chair Jerome Powell told reporters a September cut "could be on the table."
"We think the time is approaching," Powell said in response to a question from Yahoo Finance, noting that the "overwhelming sense" from his colleagues is that the case could be made for a cut "as soon as the next meeting" on Sept. 17-18.
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 in a policy statement that they are inching closer to the confidence needed to lower rates as inflation continues to cool and the job market slows.
Powell also used a press conference Wednesday afternoon to signal several times that cuts could be getting closer.
While Powell told reporters the Fed has "made no decisions about future meetings, and that includes the September meeting," he also acknowledged that "the broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate."
Federal Reserve Chairman Jerome Powell arrives to speak at a news conference Wednesday. (Andrew Harnik/Getty Images) ·Andrew Harnik via Getty Images
If central bank officials were to see inflation falling or in line with expectations, growth remaining reasonably strong, and the labor market consistent with current conditions, Powell said, "I think a rate cut could be on the table in September."
However, he noted that if inflation proved to be stickier than anticipated, the Fed would consider that, along with other factors.
"It’s not going to be just any one thing," he added.
The hints dropped by the Federal Open Market Committee on Wednesday came in the slight changes it made to a policy statement.
Another sign from the statement 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."
Traders and investors listened closely today at Jerome Powell's press conference for any more clues about the future direction of monetary policy. (REUTERS/Brendan McDermid) ·Reuters / Reuters
Officials did maintain some cautious language, 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 characterized inflation as "somewhat" elevated even while reiterating it had eased over the past year.
The language changes made Wednesday came after some key Fed officials emphasized in the weeks leading up to the July FOMC 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 Wednesday noted that job gains have moderated. While the unemployment rate has moved higher, they added, it remains "low."
Most Fed watchers said before Wednesday's meeting that 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 likely want to see what the July and August readings show first.
Powell told reporters that at this week's FOMC meeting "there was a real discussion" about what the case would be for cutting now.
"Overwhelmingly the sense of the committee was not at this meeting but as soon as the next meeting," he added in response to a question from Yahoo Finance.
When asked if there was a growing sense of confidence on the committee that a cut could be made in September, he added, "Yes," as long as the data supported such an outcome.
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.
Donald Trump looks on in November 2017 at his then-nominee for the chairman of the Federal Reserve Jerome Powell. (Drew Angerer/Getty Images) ·Drew Angerer via Getty Images
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.
Powell was asked Wednesday afternoon if he thought the Fed could remain nonpolitical with a September rate cut.
