The US Federal Reserve voted to leave interest rates on hold for the eighth consecutive meeting but gave some indication that rate cuts might be on the way.
The unanimous decision, which was widely expected by investors, means the federal funds rate will remain in a range of 5.25-5.50 per cent, its highest level for 23 years.
The Fed’s statement did not give any clear guidance as to when it might start cutting interest rates.
Read more
Crucial US inflation data rises slightly faster than expected as Fed ponders next rate move
“In recent months, there has been some further progress toward the committee’s two per cent inflation objective,” it said, an improvement on June’s description of ‘modest progress’.
However, it noted that unemployment “remains low” and said that rate-setters want to have “greater confidence that inflation is moving sustainably toward two per cent”.
Jerome Powell, chair of the Fed, was slightly more dovish in the press conference that followed the decision.
“Our confidence is growing because we’ve been getting good data,” he said, but refused to give any forward guidance.
Paul Ashworth, chief North America economist at Capital Economics, suggested there was enough in the statement to make a September cut likely.
“Officials are positioning themselves for a cut at the next meeting in September,” he said.
Over the past few weeks investors have grown increasingly confident that the Fed would be in a position to start easing policy in September on the back of easing inflation and a loosening labour market.
The latest figures showed that inflation came in below expectations in June, falling to 3.0 per cent from 3.3 per cent in May.
Unemployment has also started to pick up in a sign that the US labour market, which has remained remarkably resilient, may be starting to turn.
“The downside risks to the employment mandate are real now,” Powell said, in a sign that policymakers are worried about the potential impact of leaving rates on hold for too long.
However, the Fed still has reasons to be cautious. The latest GDP figures also showed that the US economy raced past expectations in the second quarter, growing at an annualised rate of 2.8 per cent.
Figures out last week also showed the core personal consumption expenditures (PCE) price index, which is the Fed’s preferred gauge of inflation, remained stuck at 2.6 per cent in June.
The Bank of England will announce its latest decision on interest rates tomorrow with markets uncertain about whether rates will be left on hold or cut.