US Fed holds key rates elevated at two-decade high, Powell nods to possible September cut; 5 major takeaways

The US Federal Reserve announced its fifth interest rate decision for 2024 on July 31, after a two-day Federal Open Market Committee (FOMC) meeting. For the eighth straight meeting, the FOMC unanimously voted to leave the key benchmark interest rates unchanged in the range of 5.25 per cent—5.50 per cent, broadly in line with Wall Street estimates and market analysts.

The US central bank has maintained its key overnight interest rate at the 23-year high mark for 12 straight months, i.e., since July 2023, to combat the worst inflation outbreak in 40 years. However, in a post-policy press conference, Fed chair Jerome Powell signalled that it cut key rates ‘’as soon as September.''

Follow US Fed Meet Live Updates: FOMC holds rates steady for 12 months, admits ‘progress’ on inflation; Powell flags Sept cuts

The US Fed maintained that its interest rate decisions remain data-dependent. In its statement, officials said the Fed is “attentive to the risks to both sides of its dual mandate” — price stability and full employment — adding that the central bank doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward two per cent.”

US Fed Policy July 2024: Here are 5 key highlights

1.US interest rates at over 2 decade-high

The Fed kicked off an aggressive monetary policy tightening cycle by raising the policy rate by 5.25 percentage points since March 2022—in one of the swiftest Fed reactions to rising price pressures that eventually hit a four-decade high peak. 

The Fed’s rate hikes have helped lower annual inflation from a peak of 9.1 per cent in June 2022 to 3.2 per cent. However, high rates have made borrowing costlier for businesses and households. Policymakers must keep rates high enough to slow spending and defeat high inflation without derailing the economy.

The longer the Fed keeps borrowing costs high, the more it risks weakening the economy too much and causing a recession. Yet, if it cuts rates too soon, it risks reigniting inflation, which is still volatile due to geopolitical conflicts and uncertain outlook.

US inflation has cooled steadily in the second half of last year, raising hopes that the Fed could achieve a rare ‘soft landing’, where it would conquer inflation through rate hikes without causing a recession. However, it was unexpectedly high in the first three months of 2024, delaying hoped-for rate cuts and potentially imperilling a soft landing.

Also Read: Wall Street cheers US Fed policy: S&P 500, tech-heavy Nasdaq clock best day in 5 months on Powell’s rate cut view
 

2.Fed chair Powell fuels rate cut bets for September

Federal Reserve Chair Jerome Powell has set the stage for the central bank's first rate cut in four years, citing greater progress toward lower inflation and a cooler job market that no longer threatens to overheat the economy. 

Speaking to reporters after the policy decision was published, 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 of tackling 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.” 

In its statement, the Fed admitted that there has been some further progress toward the two per cent inflation objective. This marks a slight change in tone from its June statement when it noted only that "modest further progress" had been made. “We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate,” Powell said, “but we’re not quite at that point.” 

Powell also noted 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 impacting. "The time is coming when it will begin to be appropriate to dial back that level of restriction," he continued, adding that the Fed would remain attentive to the incoming data.

Also Read: US Fed Meeting verdict today: Interest rate to inflation projection — here are key indicators to watch

3. US Fed to slow down pace of balance-sheet runoff 

In its policy statement, the US Fed said, ‘’The Committee will continue reducing its holdings of Treasury securities, agency debt and agency mortgage‑backed securities.'' The Fed had announced it would scale back the pace at which it is shrinking its balance sheet starting on June 1, allowing $25 billion in Treasury bonds to run off each month compared to the current $60 billion.

Mortgage-backed securities will continue to run off by up to $35 billion monthly. The central bank has been winding down its holdings since June 2022 — a process known as quantitative tightening. Fed policymakers gradually increased the combined amount of Treasury and mortgage bonds, allowing them to run off without being reinvested to a total of $95 billion per month. 

4.Powell's view on rate cuts, US economy

Powell provided little guidance on how often the Fed might reduce rates in the coming months. “I can imagine a scenario in which it would be everywhere from zero cuts to several cuts by the end of this year,'' he said.

The Fed chair portrayed the US economy as a sweet spot, with inflation falling and hiring occurring steadily. At the same time, wage growth has cooled, which can reduce inflationary pressure in the economy, as many businesses will lift prices to offset higher labour costs. “It's neither an overheating nor a sharply weakening economy,” Powell said. "It’s kind of what you would want to see.” 

Earlier Wednesday, a key gauge of wages grew more slowly in the second quarter compared to the first three months of this year, though the increase was still faster than inflation. With the US unemployment rate ticking higher for three months, some economists have raised concerns that the Fed should cut rates more quickly later this year.

Also Read: US inflation cools for third straight month at 0.1% in June; Wall Street lifts Fed rate cut bets for September
 

5.Wall Street scores best Fed day: S&P 500, Nasdaq clock best day in 5 months

On Wall Street, the Dow Jones Industrial Average rose 99.46 points, or 0.24 per cent, to 40,842.79. Major US indices spent almost all day in positive territory, hitting peaks during Fed Chair Jerome Powell's post-policy press conference.

The broad-based S&P 500 jumped 1.6 per cent for its best day in five months, i.e., since February, while the tech-rich Nasdaq Composite Index led major indices, winning 2.6 per cent to finish at 17,599.40. Since February, it was the biggest one-day percentage gain for the S&P 500 and the Nasdaq.

Wall Street rate cut bets: According to CME Group data, futures traders remain confident that a rate cut will occur in September, giving such a scenario a 100 per cent probability. At the June policy meeting, Fed officials responded to a small uptick in inflation by lowering the number of cuts they pencilled in for this year from three to one.

However, since then, data has painted a much better economic scenario, and futures traders now assign a probability of around 75 per cent that the US central bank will make three quarter-point moves this year. The cuts are expected to come in three separate quarter-point moves. Analysts remain divided, although many predict two or three cuts over the final three meetings in 2024.

Traders increased their bets that the Fed would start easing in September, even after Powell said policymakers are not considering a 50-basis-point interest rate cut. Rate futures contracts continue to centre around expectations for a more usual 25-basis-point cut in the next meeting to start a series of rate reductions that could last into next year.

Rate futures prices now reflect about a 17 per cent chance of a 50-basis point rate cut in September. Prices also reflect increased confidence the Fed will cut a total of 75 basis points over its final three meetings of the year, most likely in 25-basis-point increments, bringing the policy rate down to a 4.5 per cent-4.75 per cent range.
 

(With inputs from AFP, AP, Bloomberg, and Reuters)