The Federal Reserve is expected to set the stage for the first rate cut in four years on Wednesday, a significant change in policy that could eventually result in lower borrowing costs for American consumers and businesses. The Fed has been fighting inflation for the past two years.
Over the past few months, inflation has been gradually approaching the Fed’s 2% target. In addition, the labor market has become less active, as evidenced by the unemployment rate rising by 0.5% to 4.1% this year. According to Fed officials, their goal is to strike a balance between the need to keep interest rates high enough to contain inflation and the risk of doing so for an extended period of time that would trigger a recession.
Rate reductions, possibly as early as September, could assist the Fed in accomplishing a “soft landing,” which would combat high inflation without causing a recession. The presidential contest this year may also be impacted by this result, since Republicans have attempted to link Vice President Kamala Harris to the past three years’ inflation spike. Donald Trump, the former president, stated that the Fed shouldn’t lower rates prior to the election.
Member of the Fed’s governing board Christopher Waller stated earlier this month, “I do believe we are getting closer to the time when a cut in the policy rate is warranted, even though I don’t believe we have reached our final destination.”
According to futures markets, financial market traders have priced in a 100% chance that the central bank will lower its benchmark rate during its meeting on September 17–18. As a result, experts believe Fed Chair Jerome Powell does not need to give the markets any additional guidance on Wednesday regarding the timing of a cut.
Powell will instead have more chances in the upcoming months to discuss the Fed’s views on inflation and interest rates, especially during his speech at the annual Fed conference in Jackson Hole, Wyoming, in late August. Because of this, he might not give away much on Wednesday about how soon the Fed will begin cutting rates. Unless there is evidence that the job market is faltering, which would prompt the Fed to act quickly, economists anticipate relatively gradual cuts.
Nevertheless, in order to set the stage for a cut in September, the Fed may change a few sentences in the statement it issues following each meeting.
For instance, Fed officials stated in a statement following its June meeting that “in recent months, there has been modest further progress toward the (Fed’s) 2% inflation objective.” The term “modest” may be dropped by the Fed on Wednesday, or it may be changed in some other way, to emphasize that further progress on inflation has been made.
The government announced on Friday that annual inflation, as measured by the Fed’s preferred inflation measure, dropped to 2.5% in July, which represents the most recent positive development regarding price increases. That is the lowest since February 2021, when inflation was only beginning to pick up speed, and it is down from 2.6% the previous month.
With the completion of numerous new apartment complexes in major cities, rental prices—a major contributor to overall inflation—have begun to notably decline, which is encouraging news for the Fed.
One of the most prominent examples of “catch-up” inflation, or prices rising this year due to distortions from the pandemic economy, was rental inflation. During COVID, a large number of Americans moved out on their own or sought out more living space, which increased the cost of both homes and rent.
Long into this year, the government’s measures of rental inflation have been rising more quickly than usual to reflect those increases. This is happening even though the number of apartments being built is increasing more slowly. Additional instances of “catch-up” inflation include auto insurance, which increased more than 20% this year compared to the previous year as a result of higher premiums from insurance companies in order to offset the spike in new car prices brought on by the pandemic. However, even the cost of auto insurance has begun to increase more slowly.
For a long time, Powell has stated that the Fed was looking for “greater confidence” that inflation was returning to its target of 2%. Prior to the most recent inflation figures, he stated earlier this month that the data on inflation does “add somewhat to confidence” that it is cooling.
Powell and other Fed officials have expressed concern that a high rate of job creation and quickly increasing salaries could lead to inflation since some businesses would probably raise prices to make up for the increased labor expenses.
But recent hiring and wage growth have slowed, and Powell stated this month that the labor market is “not a source of broad inflationary pressures for the economy.”
The government will release a quarterly wage growth measure on Friday. It is expected to demonstrate that, although paychecks are growing at a healthy rate, they are not growing as quickly as they did a year ago, which adds to the evidence that inflationary pressures have decreased.
