(Bloomberg) -- Federal Reserve Chair Jerome Powell signaled central bank officials are on course to cut interest rates in September unless inflation progress stalls, citing risks of further labor-market weakening.
Powell said policymakers are moving closer to lowering borrowing costs from a more than two-decade high, highlighting a growing confidence at the Fed to dial back its restraints on the economy. He was careful, however, not to wed officials to a rate reduction should price data prove disappointing in the coming months.
“The changes in the statement and the press conference today basically tell you that September is going to happen unless the economic outlook changes materially,” former New York Fed President William Dudley said on Bloomberg Television.
The Federal Open Market Committee held the federal funds rate in a range of 5.25% to 5.5% on Wednesday, a level they have maintained since last July.
“The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market,” Powell told reporters Wednesday. “If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”
Adjustments to the post-meeting statement, followed by Powell’s comments, underscored how policymakers are increasingly worried about unduly weakening the labor market, a shift from their laser focus on inflation for more than two years.
“The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate,” policymakers wrote, rather than prior wording focused just on inflation risks.
Powell framed the labor market as solid but slowing. Hiring has moderated, and the unemployment rate has ticked up to 4.1% — the highest since 2021 but still a historically low level. Layoffs remain modest.
But he said it doesn’t need to soften more for the Fed to reach its 2% inflation goal.
“We’ve had this really significant decline in inflation and unemployment has remained low,” Powell said at the press conference, adding that it was an unusual and welcome outcome. “What we’re thinking about all the time is ‘how do we keep this going?’”
Balancing Risks
The Fed is determined to lower inflation without sparking a recession, but Powell has also emphasized the delicate balance between cutting rates too soon — and reinvigorating inflation — and cutting too late. By starting to lower rates in September, likely before inflation has fully returned to 2%, they may build in some insurance to keep the labor market from markedly deteriorating.
“The job is not done on inflation but nonetheless we can afford to begin to dial back the restriction in our policy rate,” Powell said.
The elevation of the labor market risks to an equal footing with inflation reflects both political and economic tension.
A jump in unemployment when 2% inflation is nearly in hand, especially after the central bank moved too slowly to combat price pressures on the way up, would open the Fed up not only to criticism but also potentially damage their credibility with the public.
Markets took the news in stride, with Treasuries rallying after Powell’s press conference. Interest-rate swaps showed traders have fully priced in a quarter point cut in September — and a total of almost 70 basis points worth of reductions for the year.
“It would take a major reversal in the inflation data to take September off the table,” said KPMG Chief Economist Diane Swonk.
Still, a September cut is not a done deal. While inflation as measured by the Fed’s preferred gauge rose 2.5% in the 12 months through June, and figures have been trending lower, policymakers are wary of it stalling like at the start of the year.
Powell said he “can imagine a scenario in which there would be everywhere from zero cuts to several cuts” over the remainder of the year, “depending on the way the economy evolves.”
“This is a Fed who wants to give itself as much optionality as possible and the worst position for the Fed to be in is backed into a corner,” said Nela Richardson, chief economist at ADP. “What’s playing in the Fed’s favor is how low the unemployment rate continues to be, so they can afford to be patient.”
--With assistance from Craig Torres, Steve Matthews, Charles Ayitey and Christopher Anstey.
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