The Federal Reserve is getting closer to cutting interest rates
The Federal Reserve held interest rates steady Wednesday, but indicated a rate cut could come as early as September if inflation continues to moderate.
Prices in June were up just 2.5% from a year ago, according to the central bank's preferred inflation yardstick. While that's higher than the Fed's target of 2%, it suggests inflation continues to move in the right direction, clearing the way for the Fed to lower borrowing costs in the near future.
"The broad sense of the committee is that the economy is moving closer to the point where it would be appropriate to reduce our policy rate," Fed chairman Jerome Powell told reporters. "A reduction in our policy rate could be on the table as soon as the next meeting in September.”
For now, Fed policymakers voted unanimously to keep their benchmark rate between 5.25 and 5.5%, where it's been for the last year. That matches the highest level in more than two decades, making it more expensive to get a car loan, finance a business or carry a balance on your credit card.
The Fed is hesitant to wait too long
While Fed officials previously worried that cutting interest rates prematurely might rekindle inflation, they're increasingly confident that price stability is close to being restored. They're also concerned that waiting too long to cut rates could needlessly weaken the job market.
The unemployment rate inched up to 4.1% in June — from a half-century low of 3.4% in 2023. Data for last month will be released on Friday.
"What we think we’re seeing is a normalizing labor market, and we’re watching carefully," Powell said. "If it starts to show more than that, then we’re well-positioned to respond.” .
A cooling job market was evident in a report from the Labor Department Wednesday, showing employers' labor costs are growing more slowly. The cost of wages and benefits rose 4.1% for the twelve months ending in June, compared to 4.5% the previous year.
Moderating labor costs should help to keep a lid on inflation, especially in the labor-intensive service sector.
A September rate cut would come in the thick of the fall presidential campaign, but Powell insisted that the political calendar would not be a factor in the central bank's decision-making.
"We never use our tools to support or oppose a political party, a politician or any political outcome," Powell said. "If we get it right, the economy will be stronger, we’ll have price stability. People will find jobs. Wages will rise in real terms. Everyone will benefit."
Transcript
ARI SHAPIRO, HOST:
The Federal Reserve voted to hold interest rates steady today, but it signaled that lower rates could soon be on the horizon. That's a sign of progress against stubborn inflation. NPR's Scott Horsley is here to tell us more about it. Hi there.
SCOTT HORSLEY, BYLINE: Hi, Ari.
SHAPIRO: OK, so borrowing costs will remain high for now, but maybe not for much longer. What's the Fed responding to here?
HORSLEY: The Fed's looking at an economy where inflation has moderated and where the once-sizzling job market has begun to cool off. Now, the central bank is not ready to adjust interest rates just yet. For now, it's keeping its benchmark rate between 5 1/4 and 5 1/2 percent, where it's been for a year now. That means it's going to remain relatively expensive to borrow money, as anyone knows who's tried to get a car loan or a mortgage or who's carrying a balance on their credit card.
But investors are betting that the Fed will be ready to start cutting interest rates at its next meeting in September, and Fed Chairman Jerome Powell says, barring any big surprises in the next couple months, that's possible.
(SOUNDBITE OF ARCHIVED RECORDING)
JEROME POWELL: We have made no decisions about future meetings, and that includes the September 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. A reduction in our policy rate could be on the table as soon as the next meeting in September.
HORSLEY: Investors liked the sound of that. The S&P 500 index jumped about 1 1/2 percent today, and the rate-sensitive NASDAQ soared more than 2 1/2 percent.
SHAPIRO: Does that mean inflation's under control?
HORSLEY: Not quite - but we are getting closer. You know, if you look at the Commerce Department's inflation yardstick, which is the Fed's preferred measure, it showed prices in June were up just 2 1/2 percent from a year ago. That's not too far above the Fed's target inflation rate, which is 2%.
Now, for a long time, the Fed was nervous that if it cut interest rates too soon, it might run the risk of rekindling inflation. Now it's also concerned that if it waits too long, it might needlessly slow the economy and even put people out of work. We have begun to see a little softening in the job market. Not a whole lot - but Powell says he and his colleagues are keeping a close eye on that.
(SOUNDBITE OF ARCHIVED RECORDING)
POWELL: What we think we're seeing is a normalizing labor market, and we're watching carefully to see - if it starts to show signs that it's more than that, then we're well positioned to respond.
HORSLEY: Unemployment has been inching up in recent months. It's still low by historical standards, and Powell thinks what we're seeing is just a sign of normalization, not a sharp downturn in the job market. If we were to get a sharp slowdown, that would be another reason for the Fed to cut interest rates, maybe even more aggressively.
Keep in mind, though, just as it took a long time for rising interest rates to start having an effect on inflation, it could take a long time for falling interest rates to have much of an effect on the job market. These moves by the Fed don't sway the economy overnight, so that's why the timing here is so sensitive.
SHAPIRO: And speaking of timing, if the Fed does cut rates in September. That would be right in the thick of the presidential campaign. Does that affect the Fed's decision making?
HORSLEY: Powell insists that is not a part of their calculation, which is not to say there won't be political pressure. You know, we've already heard jawboning from former President Trump that the Fed should not cut interest rates before the election. Trump fears that might help the Democrats. Of course, some on the left have wanted a rate cut long before this. The Fed chairman says he and his colleagues will stay focused on the economic indicators, not which way the political winds are blowing.
(SOUNDBITE OF ARCHIVED RECORDING)
POWELL: We never use our tools to support or oppose a political party, a politician or any political outcome. The bottom line is, if we get it right, the economy will be stronger. We'll have price stability. People will find jobs. Wages will rise in real terms. Everyone will benefit.
HORSLEY: You know, Powell says every time he's asked about this, that getting the economics right is hard enough without trying to add in a political decision factor. He notes this is the fourth presidential election since he joined the board of the central bank, and that independence from politics has been their policy throughout.
SHAPIRO: NPR's Scott Horsley, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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