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The Federal Reserve\u2019s policymakers kept interest rates flat Wednesday, but signaled a rate cut would be coming soon. <\/p>\n
The rate-setting committee offered few specifics on the central bank\u2019s upcoming plans in its statement<\/a> released Wednesday. However, today\u2019s decision to hold interest rates steady makes a cut a strong possibility at the next meeting in September if inflation comes \u201cdown quickly\u201d and the labor market remains \u201cconsistent\u201d with where it is at the moment, according to Federal Reserve Chair Jerome Powell.<\/p>\n In that case \u201cthen I would think that a rate cut could be on the table at the September meeting,\u201d Powell said.<\/p>\n But Powell also repeatedly left the door open to not cut rates at the next meeting, should inflation worsen. Throughout his remarks he was clear that it was too early to make a definitive prediction until September. <\/p>\n Investors, too, were already looking toward the next meeting. \u201cToday\u2019s meeting is all about laying the groundwork for a September rate cut,\u201d said Lara Rhame, chief U.S. economist at FS Investments. <\/em><\/p>\n For some economists, that would be too late. In fact, there is a chorus of economists<\/a> and investors<\/a> who believe even a July rate cut would have been too late<\/a>. They argue that the Fed\u2019s preferred inflation metric, the personal consumption expenditures (PCE) index, has been approaching its 2% target for months. But approaching a target is not the same as hitting it. For months the Fed has been clear that while the economy is making progress on inflation it wants to see evidence this trajectory is becoming permanent.\u00a0<\/p>\n Since the beginning of the year Powell has been warning that he wants \u201cmore good data<\/a>\u201d that would demonstrate inflation won\u2019t get stuck above the Fed\u2019s target rate.\u00a0The data so far seems to point to inflation\u2019s continuing to fall, although it doesn\u2019t yet guarantee it, according to Powell. \u201cMore good data would cause us to gain more confidence,\u201d he said Wednesday.<\/p>\n Some investors agreed with Powell\u2019s preference to wait for more data. \u201cWaiting until the September [meeting] for the start of a rate cut campaign gives the Fed two more CPI reports to react to, which may confirm the nascent disinflationary trends that have begun to unfold over the last few months,\u201d said Mike Reynolds, vice president of investment strategy at Glenmede, before the Fed\u2019s announcement.<\/p>\n The latest data from June showed the PCE was up 2.5% compared with the same time last year. That number represented a slight dip from May when the PCE index was up 2.6%. Overall inflation, measured in the consumer price index, rose 3.0% in June compared with the prior year. Notably, however, it fell 0.1% compared with May. That was the first time the consumer price index declined month over month since May 2020<\/a>\u2014more than four years ago.\u00a0<\/p>\n The data has been positive but uneven and difficult to parse, making the Fed especially worried about ruining the progress it has made on lowering inflation without spiking unemployment. \u201cFed rate cuts will be surgical, think a nip and a tuck, meaning they will need to be carefully done under the right circumstances,\u201d Rhame said.<\/p>\n The general trajectory of these numbers shows that inflation has come down significantly from its peak in the summer of 2022. But despite stabilizing, it still hasn\u2019t come down enough for the Fed to feel comfortable<\/a> about lowering rates.\u00a0<\/p>\n Some economists consider Powell\u2019s approach overly cautious. About 25% of the economists polled in the Wall Street Journal<\/em>\u2019s <\/em>quarterly economist survey<\/a> said the Fed should have cut rates at the current July meeting. Notably, though, only 2% thought the Fed actually would.\u00a0<\/p>\n \u201cThe Fed is being extra cautious because they want to make sure inflation has indeed turned the corner, but that could be costly in terms of risking an unnecessary deterioration in the labor market,\u201d Oscar Mu\u00f1oz, chief U.S. macro strategist at TD Securities, said in a note.<\/p>\n Nobel Prize\u2013winning economist Paul Krugman said, \u201cThe Fed should cut rates now now now,\u201d in a post on X<\/a> on Monday. Krugman cited a specific metric<\/a> from the Federal Reserve Bank of New York that aims to measure inflation\u2019s \u201cpersistence.\u201d\u00a0<\/p>\n For his part, Powell has maintained that his focus was on the Fed\u2019s dual mandate of lowering inflation while maintaining near maximum employment. He has mostly succeeded in this goal, as inflation has undoubtedly come down while the job market has remained historically strong.\u00a0<\/p>\n But progressives point to a sharply slowing job market, which could be an early sign of a recession. On Wednesday job growth in the private sector slowed more than expected, adding just 122,000 jobs in July, according to data from ADP, while the unemployment rate for June ticked up to 4.1% from 4% in May. That comes after the unemployment rate had been below 4% since February 2022.<\/p>\n Powell characterized this as a stabilization of the labor market. \u201cConditions in the labor market have returned to about where they stood on the eve of the pandemic: strong, but not overheated,\u201d he said.<\/p>\n But he made clear he wouldn\u2019t like to see it worsen. \u201cI would not like to see material further cooling in the labor market,\u201d Powell told reporters.<\/p>\n<\/div>\nRecommended Newsletter: <\/strong>CEO Daily provides key context for the news leaders need to know from across the world of business. Every weekday morning, more than 125,000 readers trust CEO Daily for insights about\u2013and from inside\u2013the C-suite. Subscribe Now<\/a>.<\/div>\n