The Federal Reserve left interest rates unchanged at its July meeting but opened the door to a September rate cut, citing progress on inflation and signs of cooling in the labor market.
In a statement following its two-day policy meeting, the Federal Open Market Committee kept the federal funds rate at 5.25% to 5.50% while dropping language about "additional firming" that had appeared in previous communications. The shift, though subtle, represented the clearest signal yet that the central bank believes its year-long campaign against inflation is bearing fruit.
Consumer prices rose 3.4% in the year through July, down from a peak of 9.1% in 2022 but still above the Fed's 2% target. Chair Jerome Powell emphasized during a press conference that policymakers need to see more evidence that inflation is sustainably declining before committing to rate cuts, but markets interpreted the change in statement language as a strong hint.
The decision to hold rates was unanimous, though minutes from the meeting later revealed that some officials had argued for a quarter-point cut. The labor market has shown signs of softening, with job openings declining and wage growth moderating from pandemic-era highs.
Financial markets rallied on the news, with the S&P 500 and Nasdaq both reaching new highs. The bond market is now pricing in a roughly 75% chance of a rate cut at the September meeting, with some traders betting on multiple reductions before year-end. For borrowers, mortgage rates and auto loan costs have already begun edging lower in anticipation.
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