Quick Bites | Fed Hints at Sept Rate Cut

The Federal Reserve kept interest rates at a two-decade high on the last day of July, while leaving the door open for rate cuts at its next meeting in September. In a unanimous decision, the Fed kept its policy rate in a range of 5.25%-5.5%, where rates have remained since last July.

“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,” chair Jerome Powell said in a post-meeting press conference. Inflation has receded alongside signs that high borrowing costs are taking a toll on the labour market, raising expectations that the Fed will lower rates soon. Recent economic data shows inflation is moving closer to the Fed’s target and the labour market is slowing.  “The question will be whether the totality of the data evolving outlook in the balance of risks are consistent with rising confidence on inflation and maintaining a strong labour 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,” Powell added.

The Fed’s preferred inflation gauge was 2.5% in June compared to the same period a year ago, well-below the 7% peak in 2022.

Meanwhile, hiring has slowed, and the job market has softened. The unemployment rate is still historically low, but it has risen 0.4% since the beginning of the year.

Projections released after the Fed’s policy meeting in June showed officials on the fence about whether it expected one or two rate cuts this year.

The yield on the 10-year Treasury note fell to its lowest level since March. Treasury yields have steadily fallen over the past month as markets have digested economic data suggesting the US economy remains relatively healthy despite a cooling job market.

Financial markets expect a September rate cut is a near certainty and see an increasing probability of 2 more cuts before year-end.

Sharp rally in 10-year Treasuries – One Month Chart

Source: Trading Economics