Powell says Fed could cut rates 'as early as' September meeting

By Amara Omeokwe, Bloomberg; Translated by Deng Tong, Golden Finance

Federal Reserve Chairman Jerome Powell said the Fed could cut interest rates as early as September after the U.S. central bank voted to keep its benchmark rate at its highest level in more than 20 years.

"The question is whether the overall data, the changing outlook and the balance of risks are consistent with rising confidence in inflation and a solid labor market," Powell told reporters on Wednesday. "If that criteria is met, we could lower the policy rate as early as our next meeting in September."

His comments followed the Federal Open Market Committee's decision to keep the federal funds rate in a range of 5.25% to 5.5%, where it has been since July last year.

Policymakers also made several tweaks to the wording of their statement issued after two days of meetings in Washington, suggesting they are closer to lowering borrowing costs. Notably, the committee shifted to saying it was "focused on risks to both sides of its dual mandate," moving away from previous language that focused solely on inflation risks.

"In recent months, the Committee has made some progress toward its 2 percent inflation objective," the FOMC statement said. The Committee judges that risks to achieving its employment and inflation objectives will continue to balance."

Officials also tempered their assessment of the labor market, noting that job growth has slowed and the unemployment rate has risen but remains low. They said inflation has eased over the past year but remains "somewhat elevated."

Still, policymakers said they do not believe it would be appropriate to lower borrowing costs until they are "more confident" that inflation is moving sustainably toward their goals.

The two-year Treasury yield moved lower, and the S&P 500 rose on the day, while the dollar remained lower. According to futures markets, expectations for a quarter-point rate cut in September remain above full expectations, meaning investors believe a larger cut could be in the cards.

Still, when asked at a news conference about the prospect of a half-percentage point rate cut, Powell said at a news conference that "it's not something we're thinking about right now."

The change in the statement solidifies a shift in tone from several policymakers, including Powell, who recognize the growing risks facing the labor market. It could also bolster expectations among economists and investors for a rate cut at the central bank's Sept. 17-18 meeting.

Powell told reporters he could "conceivably range from zero to multiple rate cuts" over the remainder of the year "depending on how the economy evolves."

The Fed chairman also said there was "a real discussion about what actions to take at this meeting," adding that there was "overwhelming support for no action at this meeting."

Balancing risks

Officials are increasingly emphasizing the Fed's responsibility to promote full employment after more than two years of focusing too much on its mandate to maintain price stability. They now see the risks to achieving both goals as more balanced.

Powell reinforced that theme at his news conference, arguing that the risk of an unexpected increase in inflation has fallen as the labor market cools, while downside risks to the labor market "are now real."

While the job market remains generally solid, the unemployment rate has risen in each of the past three months, reaching 4.1% in June, the highest level so far in 2021.

In addition, the pace of hiring has slowed and has become more concentrated in a few industries, and the ratio of job openings to unemployed workers has returned to 2019 levels.

The trend has led some Fed policymakers to warn that a further slowdown in the labor market could lead to higher unemployment, an outcome the Fed wants to avoid.

The U.S. economy has remained remarkably resilient against a backdrop of high interest rates, maintaining a solid pace of growth amid healthy consumer spending. That resilience is key to hopes that the central bank can keep a lid on inflation without triggering a recession.

Recent inflation data have also been more encouraging, having resumed its downward trend and moved closer to the central bank's 2% target. Powell previously said the data "provides some confidence" that inflation will continue to cool.

The Fed's preferred underlying inflation measure rose a modest 0.2% in June and is up 2.6% from a year earlier.

Several former Fed officials and economists, including former Fed Vice Chairman Alan Blinder and former New York Fed President William Dudley, had urged the Fed to cut rates at the meeting.