Powell: Fed could cut rates ‘as soon as’ September if inflation, job market keep cooling

Federal Reserve Chair Jerome Powell said Wednesday that the central bank could cut rates “as soon as” September if inflation and the job market continued to cool down.

After the Fed announced Wednesday it would hold rates steady, Powell said he needed to see the combination of a continued rise in “confidence on inflation” and a “solid labor market” along with healthy economic data overall.

“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” he told reporters.

Powell’s comments came after the Fed held rates steady at a range of 5.25 to 5.5 percent Wednesday amid growing speculation that the central bank would start rate cuts later this year.

Markets had been expecting the Fed to keep rates where they are as inflation continued to fall over the summer, but not quickly enough to spur the central bank to ease its policy. The CME FedWatch prediction algorithm, which is based on futures contract prices, put the odds of a July rate cut at just 3 percent in the hours before the meeting.

Stocks rallied ahead of the decision, with the Dow Jones Industrial Average of big U.S. companies up more than 200 points in morning trading.

The Fed has maintained rates at their current level since last August in response to elevated inflation, which proved stickier than expected in its descent over the past two years.

After falling precipitously from its peak around 9 percent in June of 2022, inflation had remained above 3 percent for the last year before finally dipping into the 2-percent range in June.

Prices deflated for the first time in June, dropping by 0.1 percent from May to hit an annual rise of 2.98 percent, as reported by the Federal Reserve Bank of St. Louis.

The June jobs report from the Labor Department revealed weaker employment levels behind recent price data, with the number of jobs added to the economy in April revised down to 108,000 and jobs added in May to 208,000 for a total of 111,000 fewer jobs than previously reported. The unemployment rate also ticked up to 4.1 percent, its first time above 4 percent since 2021.

“We’ve seen one quarter of good inflation, and we’ve seen the labor market move quite a bit. And as I mentioned, I don’t think it needs to cool off any more for us to get the inflation results that are related to the labor market. Not all inflation is, of course,” Powell said.

Powell acknowledged earlier this month that central bankers had to be wary not only of sticky inflation but of an unexpected uptick in unemployment as a result of tighter labor conditions.

“We are well aware that we now face two-sided risks,” he told lawmakers earlier in July.

The Fed’s Wednesday statement included some softer language about overall economic conditions but did not make a clear suggestion that rate cuts were on the immediate horizon.
The Fed said that “job gains have moderated” and that “the unemployment rate has moved up but remains low.”

“The Committee is attentive to the risks to both sides of its dual mandate,” Fed officials wrote, referring to their remit to keep prices stable while minimizing unemployment.

The also walked back language on the status of inflation, saying that it is now only “somewhat elevated” after previously calling it “elevated.”

Updated at 3:29 p.m. E.T.