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Key Takeaways
- The Federal Reserve held its key fed funds rate steady to push down inflation that is nearing the central bank’s goal of a 2% annual rate but is not quite there yet.
- The Fed is now widely expected to cut the rate starting in September, a perception reinforced by Fed officials’ acknowledgment of cooling inflation and a faltering job market.
- The fed funds rate influences borrowing costs for all kinds of loans including mortgages and credit cards.
- A lower fed funds rate would boost the economy, potentially encouraging businesses to hire more and halt a hiring slowdown that’s been underway since 2022.
With price increases simmering close to the Federal Reserve’s goal, the central bank signaled it’s still on track to begin reversing its two-year-old campaign of anti-inflation rate hikes—but not just yet.
As widely expected, the Federal Reserve held its key fed funds rate steady Wednesday at a range of 5.25% to 5.5%, its highest since 2001, where it has stood since July 2023. In an official statement, Fed policymakers acknowledged that inflation has fallen recently while the labor market has worsened for workers.
This reinforced financial market participants’ perceptions that the Fed is preparing to pivot from fighting inflation to supporting the job market.
Traders and economists think the Federal Reserve is likely to reduce the fed funds rate in September, although the official statement didn’t say so explicitly. Financial markets were pricing in a 100% chance of a rate cut in September according to the CME Group’s FedWatch tool, which forecasts interest rate movements based on fed funds futures trading data.
Dual Mandate In Focus
The Fed’s two-sided mission given to it by Congress, its so-called “dual mandate,” is to keep inflation low and ensure most people have jobs.
“The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance,” the FOMC said in its official statement. “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
The text of the statement differed significantly from the FOMC’s previous statement in June. For instance, it replaced language stating the committee was “highly attentive to inflation risk” with one that the committee was “attentive to the risks to both sides of its dual mandate.”
The statement also said inflation was “somewhat elevated” where in June it had said it was just “elevated.”
Turning Point Likely Ahead
A rate cut would signal a turning point in the Fed’s battle against inflation.
In 2022, the Fed began ratcheting up its benchmark fed funds rate, pushing up interest on mortgages and other loans as a result. Rate hikes are designed to discourage borrowing and spending, cooling down an overheating economy to quell a post-pandemic flare-up of rapid price increases.
Inflation has now fallen close to the Fed’s goal of a 2% annual rate. At the same time, a steady slowdown in hiring since 2022 has prompted Fed officials to grow more concerned about the employment half of the dual mandate.
Fed officials have emphasized that their interest rate decisions will be driven by economic data. There are several important economic reports before the Fed’s next interest rate decision Sept. 18, which could change the picture.
High interest rates have reverberated through the entire economy, especially in industries where purchases are usually financed. For example, home sales have languished as high mortgage rates have discouraged both buying and selling. And higher interest rates on credit cards have hurt lower-income households, contributing to an uptick of people falling behind on their bills .
Meanwhile, savers have benefitted from high rates, with many banks offering the best returns in decades on certificates of deposit and high-yield savings accounts.