The central bank’s Federal Open Market Committee said in a statement after its two-day policy meeting that “some additional progress has been made toward achieving the Committee’s 2 percent objective.” At the meeting, the committee left its overnight target range at 5.25 percent to 5.50 percent, but laid the groundwork for a rate cut at its September 17-18 meeting, just seven weeks before the U.S. election on November 5.
Federal Reserve officials are wary of anything that could undermine their data-driven approach to setting monetary policy, but the steady decline in inflation in recent months has led to a widespread consensus that the inflation war is coming to an end.
The Fed said inflation is now “somewhat elevated,” a sharp downgrade from its previous assessment that “inflation has increased” while it was fighting rising prices.
The central bank uses the personal consumption expenditures price index to target an annual 2% inflation rate. The PCE price index rose 2.5% in June after exceeding 7% in 2022. The Fed also dropped its previous language that it was “closely monitoring inflation risks,” replacing it with an acknowledgment that policymakers are now “focusing their attention on risks to both sides of our dual mandate, including the congressional mandate to maintain maximum employment consistent with stable prices.” Given the time it takes for monetary policy to affect the economy, central bankers have said it may be appropriate to reduce borrowing costs before inflation actually returns to its target. In its latest policy statement, the Fed said the economy has so far “continued to expand at a solid pace,” and that “job gains have moderated,” but the unemployment rate “remains low.”
But unemployment is rising, and policymakers are increasingly focused on avoiding a sharp rise in unemployment that would be associated with higher interest rates and slowing inflation.
The Fed did not commit to cutting rates in its September statement, reiterating that policymakers still needed “greater confidence that inflation is moving toward a sustainable 2 percent” before lowering borrowing costs.
But the change in the statement seems consistent with the assurances reached in September, which investors had been expecting: The Fed will hike rates aggressively from March 2022 through July 2023, raising its benchmark rate by 5.25 percentage points to combat the worst outbreak of inflation in 40 years.
Federal Reserve Chairman Jerome Powell is scheduled to hold a news conference at 2:30 p.m. EDT (5:30 p.m. GMT) to elaborate on the central bank’s latest statement and its outlook for the economy and interest rates.
The new policy statement was approved unanimously.
