The Federal Reserve kept interest rates unchanged in the range of 5.25% to 5.5% Wednesday, and reduced its security holdings. It added that there will not be an interest rate cut until it has gained greater confidence that inflation is moving toward its target range of 2%.
However, the Fed gave the market hints that it might cut rates in September.
“We have made no decisions about future meetings and that means the September meeting,” said Fed Chair Jerome Powell during a post-meeting news conference.
He added that the Federal Open Market Committee (FOMC), the Fed’s policy board, has a broad sense that the economy is moving closer to the point where it will be appropriate to move the interest rate. He said the decision on whether to cut rates will be data dependent.
The Fed needs to see that the data on the evolving outlook and balance of risks are consistent with rising confidence on inflation falling.
“If that test is met a reduction in the policy rate could be on the table as soon as September,” said Powell.
The news sparked a rally on Wall Street where the Dow Jones Industrial Average surged more than 400 points, before retreating and closing up 99 points to 40842. The S&P 500 jumped 85 points, or 1.6%, to 5,522. And the Nasdaq soared 452 points, or 2.64%, to 17,599. Gold leapt 1.66% to $2,492.6.
Powell said the Fed remains focused on achieving its dual goals of lower inflation and maximum employment and that the economy has made considerable progress toward both goals. He said the Fed will maintain a restrictive stance on monetary policy in order to bring demand in line with supply and reduce inflationary pressure.
Recent indicators show the economy continues to improve at a solid pace. In the labor market supply and demand conditions have come into greater balance. The unemployment rate has moved up, but remains low at 4.1%.
“We have stated that we do not expect it will be appropriate to reduce the target range for the Federal Funds Rate until we have gained greater confidence that inflation is moving sustainably toward 2%. More data will strengthen our confidence,” said Powell.
He did say that inflation has come down, but remains above the Fed’s long run goal.
“We will continue to make our decisions meeting to meeting and we know that reducing our policy too soon could reverse the progress we have made on inflation.
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