Image source: Wikipedia

The Federal Reserve did not make any changes to interest rates after its July Federal Open Market Committee (FOMC) meeting on Wednesday, holding the federal funds rate in the 5.25% – 5.50% range — where it has been since last July.

It came as little surprise, as most economists and analysts targeted the September FOMC meeting, at the earliest, as the date when a drop in rates was most likely.

But, in its statement, the Federal Reserve cited positive progress toward its goal of stable prices, or 2% inflation, and maximum employment, saying the risks to achieving these goals “continue to move into better balance.” However, the committee remains attentive to risks on both sides, and acknowledges an uncertain economic outlook.

The inflation rate, as measured by both the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE), has declined for three straight months. In June, the PCE, the Fed’s preferred measure, dropped to 2.5%, while the CPI fell to 3%.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the FOMC said in a statement. “Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the committee’s 2 percent inflation objective.”

Rate cut “on the table” in September

The committee said it won’t reduce the federal funds rate until it has gained more confidence that inflation is moving sustainably toward 2 percent.  

In his press conference after the July FOMC meeting Wednesday afternoon, Fed Chair Jerome Powell said the committee did gain greater confidence over the last three months and more good data would cause the FOMC to gain even greater confidence.

“Our confidence is gaining because we’re getting good data,” Powell said.

Powell added that the committee is “close to the point” of lowering the federal funds rate, but “not quite” there yet.

When asked about the likelihood of a September rate cut, Powell said if inflation continues to drop like it has, economic growth remains strong, and employment maintains its current pace, “a rate cut could be on the table in September.”

Powell added that no decision has been made about the September meeting or any future meeting, as all decisions will depend on the incoming data. “Anything we do before, during, or after the election will depend on the data,” he said.

When asked to compare inflation now to last year at this time, when rates were dropping sharply, Powell said what the committee is seeing now is better than what they saw last year. The drop last year was tied mostly to lower prices for goods, “but this is a broader disinflation,” including lower prices for not just goods, but also housing and non-housing services, he said.

Markets confidence is rising

The confidence of the markets in a September rate cut has risen sharply. CME’s FedWatch survey, which polls interest rate traders, puts the odds of a 25-basis point September rate cut at 93.5%, with 6.4% calling for a 50-basis point cut at the next meeting. About 60% anticipate another cut in November, while 57% see the rate at 4.50% to 4.75% in December, which would be three 25-point rate cuts.

The S&P 500 surged after 2:00 p.m. ET when the July FOMC statement was released, going from 5,514 to 5,547 at 3:00 p.m. ET during Powell’s press conference.

The S&P 500 was up 2% on the day, as of 3:00 p.m., while the Nasdaq jumped 523 points, or 3%, and the Dow gained 438 points, or 1%.

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