Name: Federal Reserve Holds Interest Rates Steady, Signals Cut in September
Uploaded: 2024-08-02T02:11:30.000Z
Description: The Federal Reserve is inching closer to cutting interest rates, signaling a rate reduction in September if inflation continues trending downward and the labor market remains solid.

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The Federal Reserve is inching closer to cutting interest rates, signaling a rate reduction in September if inflation continues trending downward and the labor market remains solid.

Fed officials left the policy rate unchanged at a 23-year high of 5.5 percent following the two-day policy meeting that concluded on July 31.

While no decisions have been made about future meetings, Powell signaled that a rate cut could be on the table as early as the September policy meeting.

"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," Powell told reporters at the post-meeting press conference.

"The question will be whether the totality of the data, the evolving outlook in the balance of risks, are consistent with rising confidence on inflation and maintaining a solid labor market. If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September."

Based on the second-quarter inflation reports, Powell noted that the U.S. economy is witnessing "broader disinflation" in goods and services.

"In a base case, you would think policy rates would move down from here," he said, adding that upside risks to inflation have dissipated.

In a post-meeting statement, the Fed stated that the U.S. economy has expanded at a solid pace, employment gains have moderated, and the unemployment rate has ticked up "but remains low."

"The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate," the Federal Open Market Committee (FOMC) <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20240731a.htm" target="_blank" rel="nofollow noopener">statement</a> said.

While there has been "some" progress in the inflation fight in recent months, price pressures continue to be "somewhat" elevated.

Looking ahead, the rate-setting committee will assess the totality of the data and a wide range of information, such as labor market conditions, inflation expectations, and global developments.
<h2>Market Reaction</h2>
The U.S. financial markets largely kept their gains intact, with the leading benchmark indexes up as much as 2.4 percent.

U.S. Treasury yields were mixed after the Fed announcement. The benchmark 10-year yield dipped below 4.13 percent. The 2-year yield firmed above 4.37 percent, while the 30-year bond shed 3 basis points to 4.37 percent.

The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, slumped to around 104.20. The index has come under pressure this month, sliding 1.1 percent in July. Year-to-date, it is up 2.9 percent.

"The argument for a cutting cycle is indeed moving toward cuts," said Jeff Klingelhofer, the co-head of investments and portfolio manager at Thornburg Investment Management, in a note. "I think the Fed really, really, really wants to cut and the market expects them to and data is not so strong that it prevents them from cutting."
<h2>Interest Rates, Inflation, and the Economy</h2>
It was widely unexpected that the Federal Reserve was going to cut interest rates at the July policy meeting, with traders giving the odds of a rate cut at 3 percent, according to the <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html" target="_blank" rel="nofollow noopener">CME FedWatch Tool</a>.

However, the futures market has been signaling for a while that the Fed is likely to pull the trigger on a rate cut at the September meeting.

A Fed policy pivot has become all but certain for Wall Street as inflation pressures soften and the U.S. economy shows signs of slowing.

Last week, the Bureau of Economic Analysis (BEA) reported that the Fed's preferred Personal Consumption Expenditures (PCE) price index <a href="https://www.theepochtimes.com/business/federal-reserves-preferred-inflation-gauge-mixed-amid-higher-energy-food-prices-5693970" target="_blank" rel="nofollow noopener">dipped</a> to 2.5 percent in June, from 2.6 percent in May. Core PCE, which omits the volatile food and energy categories, was stuck at 2.6 percent.

While the second-quarter GDP data topped expectations, other indicators are pointing to the economic landscape cooling off.

According to the Fed's latest Beige Book <a href="https://www.federalreserve.gov/monetarypolicy/publications/beige-book-default.htm" target="_blank" rel="nofollow noopener">survey</a>, five of the central bank's 12 regions reported flat or falling economic activity in June.

“Almost every district mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items, or shopping around for the best deals,” the Fed report stated.

As conditions evolve, market watchers will try to determine how fast and furious the Fed will be when loosening monetary policy.

Appearing before the House Financial Services Committee for his semiannual policy report earlier this month, Fed Chair Jerome Powell <a href="https://www.youtube.com/watch?v=An068JMUhUc" target="_blank" rel="nofollow noopener">conceded</a> that the central bank "won't go back to" the era of ultra-low interest rates between the global financial crisis of 2008–09 and the coronavirus pandemic.

The June <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240612.pdf" target="_blank" rel="nofollow noopener">Summary of Economic Projections (SEP)</a> indicated that monetary policymakers would cut interest rates by 25 basis points this year, lowering the median benchmark federal funds rate to 5.1 percent.

Next year, the SEP signaled four quarter-point rate reductions next year, lowering the median policy rate to 4.1 percent.

The Fed would prefer to lower interest rates in quarter-point increments once they launch the easing cycle, but economic data could force a half-point cut, says Greg McBride, the chief financial analyst at Bankrate.

"But we’ll get two rounds of employment and inflation data between the July and September Fed meetings," he said in a statement emailed to The Epoch Times. "If the job market were to show softening at an alarming rate, the first rate cut in September could be a half-percentage point cut. We’d likely get plenty of advance notice if that comes to pass."

Powell noted at his post-meeting press conference that there has been no decision as to whether to move ahead on a 25-basis-point or 50-basis-point cut.

<em>From <a href="https://www.theepochtimes.com/business/federal-reserve-leaves-interest-rates-unchanged-at-23-year-high-5697217">The Epoch Times</a></em>

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