Federal Reserve Chair Jerome Powell suggested on Wednesday that the central bank might reduce interest rates at its upcoming September meeting if the current trend of easing inflation continues.
This announcement comes as recent data indicates a decline in inflation closer to the Fed’s 2% target, while unemployment has risen slightly above 4%.
Powell said:
“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”
This remark signals a potential shift in monetary policy, contingent on the economic data aligning with the Fed’s expectations.
Bitcoin was holding steady above $66,000 despite some volatility during Powell’s speech. The flagship crypto was trading at $66,140 as of press time, based on CryptoSlate data.
Policy statement
In its policy statement released on Wednesday, the Fed emphasized its dual mandate of maximizing employment and ensuring price stability. Powell elaborated, stating that the central bank would adopt a “data-dependent, but not data-point dependent” approach in deciding when to cut rates.
Powell said:
“The question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market.”
The personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, showed a 2.5% year-over-year increase in June. Economists are closely watching the upcoming non-farm payrolls report, due on Friday, which is anticipated to show a slowdown in hiring.
Despite holding its benchmark rate steady at a target range of 5.25% to 5.50% on Wednesday, the Fed’s potential rate reduction — expected to be 25 basis points — is being closely watched by markets.
Powell downplayed the likelihood of a more significant 50-basis point cut, stating it is “not something we’re thinking about right now.”
Following Powell’s remarks, the S&P 500 extended its gains, rising by 2.1%, while the Nasdaq composite surged by 3.1%. Both indices moved above their 50-day moving averages. The 10-year Treasury yield dropped to 4.1%, near session lows.
Powell acknowledged the possibility of various scenarios, ranging from no rate cuts to several, depending on the evolving economic landscape. He expressed increased confidence in the inflation outlook following recent second-quarter data, emphasizing that decisions would be made on a “meeting by meeting” basis.
No plans for CBDCs
Powell reiterated that the Fed does not have the authority to issue a central bank digital currency (CBDC) and has no plans to seek it from Congress. He said:
“In terms of a CBDC, there is really nothing going on… No one here has decided that its a good idea yet.”
However, he added that the Fed is “keeping up” with what other central banks around the world are doing, noting that some of them are working to fully implement a CBDC in their local economies.
Powell also said that beyond CBDCs, “digital finances” have “really significant implications” for payments and are set to revolutionize how payments are made.
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