Fed boss Powell flags cuts ‘as soon as' September

The US Federal Reserve left its key lending rate unchanged again on Wednesday, but Fed Chair Jerome Powell signalled that the US central bank could make its first cut as soon as September.

After two days of deliberations, policymakers voted unanimously to maintain the US central bank's benchmark interest rate between 5.25% and 5.50%, the Fed said in a statement -- keeping rates at a 23-year high.

But speaking to reporters in Washington shortly after the decision was published, Jerome Powell said the first interest rate cut could come "as soon as" the Fed's next rate meeting in September if the data continue to suggest it is on track to meet its twin objectives to tackle both inflation and employment.

"The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate," he said, adding that there had been a "really significant decline in inflation."

"Chair Powell made clear in the press conference that the base-case for Fed officials is to begin cutting rates at the upcoming meeting in September," Citi economists wrote in a note to clients after the decision was announced.

‘Some’ further inflation progress
After a small uptick in inflation earlier this year, recent data suggest the Fed's mission of bringing inflation back down to its long-term target of two percent is now firmly back on track.

Its favored measure of headline inflation eased to an annual rate of 2.5 percent last month, while economic growth has remained resilient, and the labor market has come into better balance.

"In recent months, there has been some further progress toward the Committee's 2 percent inflation objective," the Fed said in its rate decision.

This marks a slight change in tone from its June statement, when it noted only that "modest further progress" had been made.

"The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance," the Fed said, adding that it was "attentive to the risks to both sides of its dual mandate."

All three major indices on Wall Street finished in the green on Wednesday following the Fed's rate decision.

Pointing in right direction
Powell told reporters that recent economic data "continue to point to kind of the direction we would want to see," and that the Fed's restrictive monetary policy was having an impact.

"The time is coming at which it will begin to be appropriate to dial back that level of restriction," he continued, while adding that the Fed would remain attentive to the incoming data.

Futures traders remain extremely confident that a September cut is coming, giving such a scenario a 100 percent probability, according to CME Group data.

At the previous rate decision in June, Fed officials responded to a small uptick in inflation by lowering the number of cuts they penciled in for this year from three down to just one.

But since then, the data have painted a much better picture, and futures traders now assign a probability of around 75 percent that the US central bank will make three quarter-point moves this year.

Analysts remain divided, although many predict two or three cuts over the final three meetings of the year.

If the Fed does move in September, its decision would thrust the independent US central bank into the middle of the 2024 presidential election battle between former president Donald Trump and Vice President Kamala Harris.

Trump has previously accused Powell -- who he nominated -- of displaying political favoritism toward the Democratic party, and suggested that he would not reappoint the central banker as Fed chair if he wins in November.

But speaking on Wednesday, Powell insisted that the Fed would never use its tools to support or oppose a political party or any politician.

"We would never try to make policy decisions based on the outcome of an election that hasn't happened yet," he said. "That would be a line we would never cross."