The Federal Reserve on Wednesday indicated that progress has been made towards its 2% inflation target, hinting at a potential rate cut—the first in four years. In a statement following its two-day meeting, the Fed noted that “job gains have moderated” and acknowledged a rise in the unemployment rate. The central bank, which is mandated by Congress to ensure stable prices and maximum employment, emphasised it is now “attentive to the risks” to both goals, marking a shift from its recent focus solely on controlling inflation.
The Fed’s policymakers unanimously decided to keep the benchmark interest rate unchanged between 5.25% and 5.50%, according to the statement.This decision reflects “some further progress” in combating inflation.
Despite pressure from many Democratic officials and some economists to lower rates and support the economy, Fed policymakers opted to maintain their key rate at a 23-year high of 5.3%. Some Republicans, including former President Donald Trump, have argued that a rate cut before the upcoming election could appear politically motivated.
Ahead of the Fed’s announcement, financial markets had fully anticipated a rate cut at its next meeting on September 17-18, according to futures markets. The Fed generally aims to avoid surprising investors with its rate decisions.
The Fed is attempting to balance keeping rates high enough to reduce inflation, which has decreased to 2.5% from a peak of 7.1% two years ago, while avoiding rates so high they could trigger a recession. So far, it appears on track for a “soft landing,” where inflation reaches 2% without causing a recession.
However, with the unemployment rate rising for three consecutive months, some economists argue that the Fed should have cut rates sooner or should do so more aggressively later this year. Bharat Ramamurti, an advisor at the American Economic Liberties Project and former Biden White House economist, expressed concern, stating, “The finish line is in sight, and it would be tragic for the Fed to stumble and fall, with one-tenth of a mile left in the marathon.”
Additionally, three Democratic senators, led by Elizabeth Warren of Massachusetts, urged Chair Jerome Powell in a letter to cut rates, warning that failing to do so soon could appear as if the Fed is yielding to external pressures, which they argue would also be a political move.
Recent data has provided some positive news on inflation, with the government reporting last Friday that annual inflation fell to 2.5% in July, down from 2.6% in the previous month and marking the lowest rate since February 2021. Meanwhile, the unemployment rate has increased nearly half a percentage point this year to 4.1%, and hiring has slowed. Powell and other Fed officials have increasingly highlighted concerns about the job market, reinforcing market expectations for rate cuts soon.
The government is set to release the latest employment figures this Friday, with economists predicting the addition of 175,000 jobs in July and the unemployment rate holding steady at 4.1%.
The Fed’s policymakers unanimously decided to keep the benchmark interest rate unchanged between 5.25% and 5.50%, according to the statement.This decision reflects “some further progress” in combating inflation.
Despite pressure from many Democratic officials and some economists to lower rates and support the economy, Fed policymakers opted to maintain their key rate at a 23-year high of 5.3%. Some Republicans, including former President Donald Trump, have argued that a rate cut before the upcoming election could appear politically motivated.
Ahead of the Fed’s announcement, financial markets had fully anticipated a rate cut at its next meeting on September 17-18, according to futures markets. The Fed generally aims to avoid surprising investors with its rate decisions.
The Fed is attempting to balance keeping rates high enough to reduce inflation, which has decreased to 2.5% from a peak of 7.1% two years ago, while avoiding rates so high they could trigger a recession. So far, it appears on track for a “soft landing,” where inflation reaches 2% without causing a recession.
However, with the unemployment rate rising for three consecutive months, some economists argue that the Fed should have cut rates sooner or should do so more aggressively later this year. Bharat Ramamurti, an advisor at the American Economic Liberties Project and former Biden White House economist, expressed concern, stating, “The finish line is in sight, and it would be tragic for the Fed to stumble and fall, with one-tenth of a mile left in the marathon.”
Additionally, three Democratic senators, led by Elizabeth Warren of Massachusetts, urged Chair Jerome Powell in a letter to cut rates, warning that failing to do so soon could appear as if the Fed is yielding to external pressures, which they argue would also be a political move.
Recent data has provided some positive news on inflation, with the government reporting last Friday that annual inflation fell to 2.5% in July, down from 2.6% in the previous month and marking the lowest rate since February 2021. Meanwhile, the unemployment rate has increased nearly half a percentage point this year to 4.1%, and hiring has slowed. Powell and other Fed officials have increasingly highlighted concerns about the job market, reinforcing market expectations for rate cuts soon.
The government is set to release the latest employment figures this Friday, with economists predicting the addition of 175,000 jobs in July and the unemployment rate holding steady at 4.1%.
