The Federal Reserve has held interest rates steady at a 23-year high since last July — but a rate cut is widely expected in the coming months. On Wall Street, the outlook for an interest rate cut has shifted from if to when.
The central bank will issue its latest interest rate decision on Wednesday after a months-long stretch of data has established the key conditions for a rate cut: cooling inflation and slowing job gains.
Still, economists expect the Fed to leave interest rates unchanged on Wednesday, offering the central bank time to ensure current trends hold ahead of its next meeting in September.
The chances of an interest rate cut at the Fed’s meeting in September stand at more than 85%, according to the CME FedWatch Tool, a measure of market sentiment. The same tool shows the odds of a rate cut on Wednesday at a meager 5%.
The economy appears to be hurtling toward interest rate cuts later this year, nevertheless. Such an outcome would deliver long-sought loan relief for households and businesses saddled with expensive debt.
Price increases have slowed significantly from a peak of more than 9%, though inflation remains a percentage point higher than the Fed’s target rate of 2%. An outright drop in prices in June compared to the month prior marked a major sign of progress in slowing inflation.
The labor market has continued to grow but its breakneck pace has cooled. The unemployment rate has ticked up this year from 3.7% to 4.1%.
The Fed is guided by a dual mandate to keep inflation under control and the labor market strong. The monthslong stretch of good news for inflation alongside bad news for unemployment has prompted the Fed to give additional consideration to its goal of keeping Americans on the job, Fed Chair Jerome Powell said last month.
“For a long time, since inflation arrived, it’s been right to mainly focus on inflation. But now that inflation has come down and the labor market has indeed cooled off, we’re going to be looking at both mandates. They’re in much better balance,” Powell said at a meeting of The Economic Club of Washington, D.C.
“That means that if we were to see an unexpected weakening in the labor market, then that might also be a reason for reaction by us,” Powell added.
However, robust economic data released last week may complicate the path toward a rate cut.
The U.S. economy grew much faster than expected over three months ending in June, accelerating from the previous quarter and defying concerns about a possible slowdown, according to data from the U.S. Bureau of Economic Analysis.
If the Fed cuts interest rates as the economy is heating up, the central bank risks rekindling rapid price increases.
After the economic data came out last Thursday, the odds of a September interest rate cut fell to about 80%. The dip in sentiment proved temporary, however. The odds have risen seven percentage points since then.
