Fed holds rates steady and notes progress on inflation

WASHINGTON – Federal Reserve officials on Wednesday held short-term interest rates steady but indicated that inflation is getting closer to its target, which could open the door for future interest rate cuts.

Central bankers made no obvious indications, though, that a reduction is imminent, choosing to maintain language that indicates ongoing concerns about economic conditions, albeit with progress. They also preserved a declaration that more progress is needed before rate reductions can happen.

“The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance,” the Federal Open Market Committee’s post-meeting statement said, a slight upgrade from previous language.

“Inflation has eased over the past year but remains somewhat elevated,” the statement continued. “In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.”

However, speaking with the media, Chair Jerome Powell indicated that while no decision has been made about actions at future meetings a cut could come as soon as September if the economic data showed inflation easing.

“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” Powell said.

Markets had been looking for signs that the Fed will reduce rates when it next meets in September, with futures pricing pointing to further cuts at the November and December meetings, assuming quarter percentage point moves. Stocks rallied to the highest levels of the day on Powell’s comments.

As for the Fed’s statement, its language also represented an upgrade from the June meeting, when the policy statement indicated only “modest” progress in bringing down price pressures that two years ago had been running at their highest level since the early 1980s. The previous statement also characterized inflation as simply “elevated,” rather than “somewhat elevated.”

There were a few other tweaks as well, as the FOMC voted unanimously to keep its benchmark overnight borrowing rate targeted between 5.25%-5.5%. That rate, the highest in 23 years, has been in place for the past year, the result of 11 increases aimed at bringing down inflation.

One change noted that committee members are “attentive” to the risks on both sides of its mandate for full employment and low inflation, dropping the word “highly” from the June statement.

Still, the statement kept intact one key sentence about the Fed’s intentions: “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.”

That phrase has underscored the Fed’s data dependence. Officials insist they are not on a predetermined course for rates and won’t be guided by forecasts.

Economic data of late has indicated that price pressures are well off the boil from their peak in mid-2022, when…