Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Federal Reserve has signalled it is closer to lowering interest rates, after US policymakers voted to hold borrowing costs at a 23-year high for the eighth meeting in a row.
The Federal Open Market Committee said on Wednesday that there had been “some further progress” towards the central bank’s target of 2 per cent inflation, as price pressures have eased and the unemployment rate has risen in recent months.
Still, the FOMC maintained that it needed to gain “greater confidence that inflation is moving sustainably toward 2 per cent” before lowering borrowing costs, the same language used in its June policy statement.
In recognition of newfound concerns over the labour market confronting the Fed, the FOMC said on Wednesday that it was “attentive to the risks to both sides of its dual mandate”, affirming that it no longer viewed inflation as the foremost issue, but rather that a rising unemployment rate was also top of mind as it charts out its policy path.
The Fed’s next meeting in September, at which it is expected to lower its benchmark interest rate by a quarter point from its current 5.25-5.5 per cent, will be the last one before November’s presidential election.
Short-term Treasury yields rose slightly following the release of the Fed’s statement, as investors trimmed their bets on rate cuts this year.
Traders in the futures market are still betting on between two and three cuts, with the first coming in September, but slightly reduced the odds the US central bank will deliver three cuts by December.
The two-year Treasury yield, which moves with interest rate expectations, ticked higher, up 0.02 percentage points to 4.38 per cent after the release. The 10-year yield, which moves with inflation and growth expectations, also ticked up but remained lower on the day at 4.12 per cent.
The blue-chip S&P 500 and the tech-heavy Nasdaq, both higher on the day, showed little immediate reaction to the Fed statement.
After soaring to its highest level in decades after the pandemic, inflation is now declining steadily towards the central bank’s 2 per cent target.
The Fed’s preferred inflation gauge, based on the core personal consumption expenditures price index, is now at 2.6 per cent, having peaked at more than 5 per cent in 2022.
The US labour market is also beginning to slow from its earlier red-hot pace, with the unemployment rate rising over the past few months to 4.1 per cent. Wage pressures have also eased, new data on Wednesday showed.
The focus of Fed officials has shifted in recent months from taming runaway inflation to ensuring they do not damage the economy by holding rates too high for too long.
The central bank is trying to pull off a “soft landing”, in which inflation is brought down to target without tipping the economy into a recession.
So far, it appears to be succeeding, with price pressures declining without a sharp jump in lay-offs, as employers reduce hiring instead of cutting existing jobs.
According to data released by the Bureau of Labor Statistics on Tuesday, the number of job openings has declined from about 12mn in 2022 to 8mn in June.
Earlier this month, Fed chair Jay Powell told lawmakers that he no longer considered the world’s largest economy “overheated”, as US consumers show signs of flagging.
The unanimous decision to keep rates on hold this month was widely expected.
As of June, officials were roughly evenly split between the need for one or two quarter-point reductions this year, according to individual projections published by the Fed.
Most policymakers expected rates to fall to 4-4.25 per cent by the end of next year, before declining to about 3 per cent in 2026.
Read the full article here
