The U.S. Federal Reserve elected to keep interest rates at current levels even as it noted that progress has been made on lowering inflation and signalled that interest rate cuts are coming.
At the conclusion of its latest two-day policy meeting, the U.S. central bank chose to forgo a change in interest rates and emphasized that more progress is needed before interest rates can start to be reduced.
“Inflation has eased over the past year but remains somewhat elevated… In recent months, there has been some further progress toward the Committee’s two percent inflation objective,” reads the Federal Reserve’s latest news release.
However, when speaking with journalists after the meeting, Fed Chair Jerome Powell indicated that an interest rate cut could come as soon as this September.
“A reduction in our policy rate could be on the table as soon as the next meeting in September,” said Powell, sparking a rally in the stock market.
Futures traders are betting 100% that an interest rate cut of 25-basis points will occur this September. Markets are pricing in two more rate cuts this year – in November and December.
Markets expect interest rates in the U.S. to be at least 75-basis points lower by year’s end.
Stocks in the U.S. rallied on Powell’s latest comments, with the technology-laden Nasdaq index closing more than 400 points higher.
The U.S. Federal Reserve’s trendsetting overnight interest rate currently sits in a target range of 5.25% to 5.50%, its highest level in 23 years.
The U.S. central bank raised interest rates 11 times to help lower inflation before holding rates at their current level over the last year.
Inflation in the U.S. is currently at an annualized rate of 2.5%, down from a peak of 9.1% in June 2022. The Federal Reserve targets inflation at an annualized rate of 2%.
Despite elevated interest rates, the U.S. economy has remained resilient.
The latest data showed that the U.S. economy expanded at a healthy 2.8% annualized rate in this year’s second quarter.
