Washington CNN —
The Federal Reserve said Wednesday it will continue to hold its benchmark interest rate at current levels, marking a full year since the cost of borrowing first reached a 23-year high.
As expected, central bank officials chose not to cut rates, which would have paved the way for lower borrowing costs for Americans on everything from mortgages and car loans to credit cards.
However, the Fed gave an important clue Wednesday that it will likely cut its benchmark lending rate in the coming months: Fed officials are now wary of risks surrounding America’s labor market, which has long been a pillar of strength for the economy, according to their latest policy statement.
Officials wrote that inflation is now “somewhat” elevated — the first time inflation has been described in such a way since the Fed began to lift rates in March 2022. At last month’s meeting, the Fed’s statement said, “Inflation has eased over the past year but remains elevated.” The latest statement implies that the central bank believes inflation is even less of a risk compared to its last meeting.
This shift in how the Fed is viewing the economy means the central bank could begin paring back interest rates as soon as its next policy meeting, in September, easing pressure on US households and businesses burdened by tough borrowing costs.
Central bankers have said in recent speeches that they’re pleased with the latest inflation data, and some have pointed to the risks of not cutting rates with inflation inching closer to the central bank’s 2% target.
Chicago Fed President Austan Goolsbee recently cautioned of the effects of inflation-adjusted interest rates, which tighten their grip on the economy if inflation slows but rates remain unchanged. That could be a problem for the labor market, which seems to be at an inflection point. In addition to stabilizing prices, the Fed is also responsible for maximizing employment. Fed Chair Jerome Powell has said that an unexpected deterioration in the job market would prompt officials to consider cutting rates sooner.
But for now, the Fed has a solid chance at successfully taming inflation without a recession, an exceptionally rare achievement known as a “soft landing.”
For now, the American economy remains on solid footing. Just look at the government’s latest report on gross domestic product, which showed that the US economy expanded at a robust 2.8% annualized rate from April through June, after adjusting for seasonal swings and inflation, which was double the rate seen in the first quarter and well above economists’ predictions. The report was surprising because it also showed that inflation slowed during that period, even as the economy strengthened.
The Fed’s favorite inflation measure, the Personal Consumption Expenditures index, showed that consumer prices were up 2.5% in June from a year earlier, down from May’s 2.6% annual rate, inching closer to the Fed’s 2% target.
It’s not clear if the duo of slower inflation and stronger growth will persist. The Fed tries to wrangle inflation by deliberately cooling the economy through higher interest rates, so the latest GDP report went against that conventional wisdom. Last year, an expanding workforce and a burst in productivity growth helped corral inflation while the broader economy remained intact.
But it’s already been a year that interest rates have been perched at a 23-year high, and there have been some signs of weakness in the broader economy. For starters, the US consumer is no longer splurging, and shoppers have instead become much more careful with their dollars, according to major retailers such as Target and Walmart. Americans are still very much spending, but they’re now hunting for bargains and prioritizing in-person experiences.
The one weak spot that could become worrisome for the Fed is today’s US job market, which is now less robust than it has been in recent years. Demand for labor has tumbled dramatically over the past two years, wage growth is running at a cooler pace, and the unemployment rate is now at its highest point in more than two years, at 4.1%. It could just be a normalization from the gangbuster times of recent years, or it could be the beginning of a steeper slowdown.
The Labor Department releases July data gauging the state of the US labor market, including monthly payroll growth and the unemployment rate, on Friday.
This story is developing and will be updated.
