Waiting for a Fed rate cut? Chair Powell offered few signals of one, economists say
At least on the surface, Federal Reserve Chair Jerome Powell played it straight down the middle on the big question looming over the central bank's decision to hold rates steady for a fifth straight meeting.
Will the central bank be ready to resume its rate cuts in September as futures markets and many economists have expected?
“We have made no decision about September,” Powell told reporters. He said the economic data will guide Fed officials, noting there will be two more inflation reports and two more jobs reports by the mid-September meeting.
He also gave a nod to risks on both sides of the ledger. Raising rates too early could reignite inflation, reversing the progress made since pandemic-related product and worker shortages drove inflation to a 40 year high of 9.1% in 2022. Waiting too long could allow a the labor market to weaken significantly.
Powell specifically cited “downside risks to the labor market.”
When can we expect interest rates to go down?
Yet, while the economy's course over the next six weeks will determine what the Fed does, many forecasters and futures markets believe Powell delivered a “hawkish” message Wednesday that reduces the chances officials will be ready to act in September.
After the Fed's July 30 meeting, fed funds futures lowered the odds of a September cut to 45% from about 65%.
“We think the uncertainty and balance of risks will push most of the committee to remain in wait-and-see mode at least a few months longer, with the next rate cut not coming until December,” economist Michael Pearce of Oxford economics wrote in a note to clients.
How do high interest rates affect consumers?
For millions of Americans, that would mean relatively high borrowing costs on auto loans, credit card balances, mortgages and other debt would persist, at least for a few more months. But it also would mean higher bank savings rates for seniors and other people who depend on fixed income assets.
Amid an already slowing job market and economy, the Fed chief previously has acknowledged officials likely would be cutting rates now that inflation has eased but is waiting to see how much President Donald Trump's sweeping tariffs feed into consumer prices.
That could take a while.
The Fed lowers rates to bolster a sagging economy and raises rates or keeps them higher longer to head off inflation.
Here’s why forecasters think Powell sent a cautious message about lowering rates in the near term:
- Powell noted that while the labor market is at the Fed’s target of full employment - with unemployment at just 4.1% - inflation, at 2.7%, is still above the 2% goal. “That calls for modestly restrictive, in my way of thinking, modestly restrictive stance right now,” he said.
- Despite the Fed's higher-than-normal interest rates, “The economy is not performing as (if) restrictive policy is holding it back inappropriately,” Powell said. That doesn't sound like a Fed chief worried that high rates are hurting consumers and businesses. It “suggested he sees little reason to (trim rates) soon,” economist Samuel Tombs of Pantheon Macroeconomics said in a research note.
- Even though job growth is slowing, Powell noted labor supply growth is also downshifting because of Trump's immigration crackdown. That's keeping the unemployment rate steady at a low level, and Powell said the jobless rate should be the Fed's main focus. In other words, low unemployment could keep the Fed from reducing rates soon despite meager job gains, Pearce said.
- Powell initially seemed to throw a bone to rate-cut advocates. “A reasonable base case is that the effects on inflation could be short-lived, reflecting a one-time shift in the price level," he said. That sounds like a rate cut could be around the corner. But then he added, “It is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”
- By September, “Our view is that there won't be enough in the data to convince the committee that tariffs will prove to be a one off lift to inflation, or that the labor market is weakening decisively enough to warrant loosening policy,” Pearce wrote.
- The effects of tariffs on inflation could take a good bit more time to play out, Powell said. “We're still a ways away from seeing where things settle down,” he said. “It doesn't feel like we're close to the end of that process.”
- Nothing tariffs are starting to push up prices, Powell said the Fed is already “looking through” goods inflation by not raising rates. That “could be pushback to those who might want lower rates now," economist Michael Feroli of JP Morgan Chase wrote to clients.
(This story was updated to correct a typo)