At the conclusion of its two-day meeting Wednesday, the Federal Reserve announced it is holding steady on its restrictive monetary policy stance leaving its federal funds rate of 5.25% to 5.5% — the highest in decades — unchanged but signaled a September cut could be in the offing if current economic trends continue.
At a press conference, Fed Chairman Jerome Powell listed some of the recent economic momentum the monetary body sees as signs a rate reduction is moving into its sights, including a 2.5% inflation reading in June, a labor market that’s moved more balanced after years of overheated performance, and wage growth that is still robust but easing into more sustainable territory.
He also noted that the 19 members of the Feds rate-setting Open Market Committee voted unanimously to leave rates unchanged from where they’ve stood since July 2023 after a series of 11 straight increases were levied, a strategy aiming to cool off a too-hot U.S. economy.
While in no way guaranteeing a rate reduction will come at the Fed’s next policy meeting in September, Powell offered some foreshadowing of its likelihood, pending any unforeseen economic wobbles.
“We have made no decision about future meetings,” Powell said. “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.”
When asked why conditions didn’t warrant just making the first reduction in over four years at this week’s meeting, Powell said that while the last few months of inflation and jobs data has shown positive trends after inflation spiked earlier this year, it’s “just one quarter of data … and we just want to see more and gain confidence.”
While the U.S. unemployment rate has inched up to 4.1% after hitting a post-pandemic low of 3.4% in April 2023, and closing out last year at 3.7%, Powell noted it’s a figure that remains historically low and comes amid still solid job growth in an employment market that has averaged 177,000 new positions per month over the last quarter.
Powell said Fed officials will be monitoring and assessing all of the economic data set to come in before the September meeting and “the question will be whether the totality of the data, evolving outlook and balance of the risks are consistent with rising confidence on inflation and maintaining a solid labor market.”
“If that test is met, a reduction in our policy rate could be on the table at our next policy meeting in September,” Powell said.
Cutting rates before a presidential election?
In response to one reporter’s question Wednesday about the timing of a rate cut ahead of the U.S. presidential election in November, Powell underscored the Fed’s nonpartisan mandate.
“We don’t change anything in our approach to address other factors like the political calendar,” Powell said. “Congress has ordered us to conduct our business in a nonpolitical way. Not just some of the time, all of the time.
“We never use our tools to support or oppose a political party, a politician or any political outcome. Anything that we do before, during or after the election will be based on the data, the outlook and the balance of risks and not on anything else.”
While a series of steady U.S. inflation downticks over the second half of 2023 had spurred the Fed to signal late last year it could assess multiple federal lending rate cuts in 2024, inflation headed back up early this year and forced the monetary body to recompute. Now, it appears likely just a single rate cut will occur before the end of the year.
Interest rate adjustments are the Fed’s primary weapon in an ongoing battle against the elevated prices of consumer goods and services. The rate increases raise the cost of debt for businesses and consumers, a move that aims to reduce the amount of spending and overall economic activity. That shift in dynamics typically leads to lower inflation rates.
Here’s why the Fed’s benchmark rate matters to you
Where the Federal Reserve sets its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution’s total deposits — trickles down to consumers in numerous ways.
First, mortgage rates don’t necessarily move up in tandem with the Fed’s rate increases. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic, and were hovering around 2% in late 2021, the rates tracked up alongside the Fed’s federal funds rate hikes.
Higher rates can also make accessing credit, like qualifying for a home mortgage or new car loan, more difficult as banks tighten lending policy to reflect economic conditions. A poll conducted in March by Bankrate found half of U.S. applicants have been denied a loan or financial product since the Fed began raising interest rates two years ago. Americans with credit scores below 670 are finding it toughest to access credit.
Credit card rates are set by issuing institutions based on a number of factors, including the card applicant’s personal credit history, but base rates are computed in part using the prime lending rate which is tied to the Fed’s benchmark rates. According to the Consumer Financial Protection Bureau, over the past 10 years, average (annual percentage rates) on credit cards assessed interest have almost doubled from 12.9% in late 2013 to 22.8% in 2023 — the highest level recorded since the Federal Reserve began collecting that data in 1994.
Source Agencies
