Fed Hints at September Rate Cut Amid Cooling Inflation
The Federal Reserve has decided to maintain the target range for the federal funds rate at 5.25% to 5.5% for the eighth consecutive meeting, while hinting at a potential rate cut in September. This decision comes amid signs of cooling inflation and a moderating labor market. Fed Chairman Jerome Powell indicated that a reduction in the policy rate could be considered if inflation continues to move toward the 2% target. Despite maintaining the current rate, the Fed will proceed with reducing its holdings of treasury securities, agency debt, and agency mortgage-backed securities.
During a recent two-day monetary policy meeting, Powell noted that job gains have slowed, and although the unemployment rate has slightly increased, it remains low. He emphasized that reducing policy restraint too soon or too much could reverse the progress made on inflation, while waiting too long or doing too little could weaken economic activity and employment. The annual consumer inflation rate in the US is expected to drop to 3% in June 2023, down from a peak of 9.1% in 2022.
The Federal Open Market Committee (FOMC) also reiterated its commitment to returning inflation to its 2% objective. Goldman Sachs economists suggest that the committee's stance indicates a low bar for a rate cut in September. The Fed's decision has led to fluctuations in financial markets, with US Treasury yields initially rising but later falling following Powell's comments. The potential rate cut is seen as a move that could lower borrowing costs over time, potentially bolstering the economy and impacting financial markets globally.
