MercoPress. South Atlantic News Agency

US Fed keeps rates unchanged; chair Powell believes a cut rate “could be on the table in September”

Fed's Powell seeking a delicate balance, keeping rates high enough quell inflation, but also wants to avoid keeping borrowing costs so high that it triggers a recession.

The Unites States Federal Reserve on Wednesday, following on a two day meeting (July 30/31) kept the key interest rate unchanged at a 23 year high of 5,3%, but chairman Jerome Powell said that the stage was set for the central bank's first rate cut in four years. With lower inflation and a cooler jobs market, this could happen at the next FOMC meeting in September.

Powell said that, if inflation continues to fall, “a reduction in our policy rate could be on the table” when the Fed next meets Sept. 17-18. “We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate,” Powell said, “but we’re not quite at that point.”

Anyhow, Democrat economists and lawmakers have complained demanding the first cut should have taklen place on this opportunity, to bolstr the economy and improve Vice-president Kamala Harris’ prospects in the upcoming presidential election. Former President Donald Trump has said the Fed shouldn’t cut rates before the election. After September, the Fed’s next meeting is two days after the election in November.

The FOMC statement following the meeting said that “job gains have moderated” and acknowledged that the unemployment rate has risen. The Fed is required by Congress to pursue stable prices and maximum employment, and the statement said the central bank is “attentive to the risks” to both goals.

However Powell provided little guidance on how many times the Fed might reduce rates in the coming months. “I can imagine a scenario in which it would be everywhere from zero cuts to several cuts,” by the end of this year, he said.

The Fed is seeking to strike a delicate balance: It wants to keep rates high enough for long enough to quell inflation, which has fallen to 2.5% from a peak two years ago of 7.1%, according to its preferred measure. But it also wants to avoid keeping borrowing costs so high that it triggers a recession.

“It’s neither an overheating economy nor is it a sharply weakening economy,” Powell said. “It’s kind of what you would want to see.”

On Wednesday, three Democratic senators, led by Elizabeth Warren from Massachusetts, urged Powell in a letter to cut rates. The letter charged that a failure to reduce borrowing costs soon would suggest the Fed is “giving in to bullying” and would itself be a political move.

But Powell said on Wednesday that the upcoming elections would have no influence on the Fed’s decisions. “We don’t change anything in our approach to address other factors like the political calendar”.

In the latest piece of good news on price increases, last Friday the government said that yearly inflation fell to 2,5% in July in July. That is down from 2.6% the previous month and the lowest since February 2021, when inflation was just starting to accelerate.

At the same time, the unemployment rate has risen by nearly a half-percentage point this year to a still low 4,1% and hiring has slowed.

The Fed may be among the last of the major central banks to cut its benchmark rate. The European Central Bank reduced borrowing costs in June and the Bank of England meets Thursday August first, and may implement its first cut, though economists think it could also keep rates unchanged.

The Bank of Japan is in a different boat, as the country has long sought higher prices after decades of slow deflation. Its inflation rate has moved higher and the Bank of Japan responded earlier Wednesday by increasing its key rate.

Meanwhile in the world's second largest economy, China, liquidty measures have been implemented, with the leading commercial banks cur deposit interest rates with the purpose of lowering funding costs and boosting flow of funds to the capital's market.