Fed chair Jerome Powell signals potential rate cut in September amid easing inflation

Federal Reserve Chair Jerome Powell suggested on Wednesday (July 31) that interest rates could be reduced as early as September if the US economy continues on its projected path.

Following its latest policy meeting, the Federal Open Market Committee (FOMC) maintained the benchmark interest rate within the 5.25-5.5 per cent range set a year ago. The Fed’s softened language on inflation and employment risks indicates a readiness to lower rates.

Easing inflation and economic conditions

Powellsaid that there is a broad easing of inflationary pressures, describing the situation as “quality disinflation.”

He pointed out that if inflation continues to decline in line with expectations, and economic growth and labour market conditions remain stable, the likelihood of a rate cut will increase.

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“If we were to see inflation moving down … more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting,” he said.

Political scrutiny

Republican lawmakers have expressed concerns that a rate cut in September, close to the presidential elections, could be seen as a politically charged move.

They warned that such a decision might be perceived as an attempt to highlight economic progress and offer the promise of cheaper credit to sway voters.

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In response, Powell assured that the Fed’s considerations are based strictly on economic indicators and the trajectory of inflation towards the 2 per cent target, not political timelines. “This is how we think about it. This is what we do,” Powell said.

Some Fed policymakers even discussed the logic of cutting rates at this session, Powell said, but “the sense of the (policy-setting) committee was not at this meeting, but as soon as the next meeting depending on how the data come in.”

Market sentiment remains positive

While Fed officials are wary of any actions that could mar their data-not-politics approach to setting monetary policy, the steady drop in inflation in recent months prompted a broad consensus that the inflation battle was near an end.

With inputs from agencies