With inflation cooling, the Federal Reserve Board may start preparing to make its first rate cut in four years, The Associated Press (AP) reported.
Such a move, which would occur at the Sept. 17-18 meeting of the Fed’s Open Market Committee (FOMC), could eventually lower borrowing costs for U.S. consumers and businesses.
Inflation has been falling and is close to the Fed’s target of 2 percent, while the job market has also cooled, with unemployment rate rising about a half-point this year to 4.1 percent. Rate cuts could help the Fed achieve a “soft landing,” in which high inflation is reduced without an economic downturn.
“While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted,” said Christopher Waller, a member of the Fed’s governing board, earlier this month, according to the AP.
Economists expect relatively gradual cuts, unless there is evidence that the job market is faltering, which would spur the Fed to move faster.
The FOMC, which met on July 30 and 31, could make or revise statements that offer a hint of what is to come in advance of its September meetings. In the statement it released after its June meeting, for example, Fed officials said, “In recent months, there has been modest further progress toward the (Fed’s) 2% inflation objective.” After the July meetings, the FOMC could remove or change “modest” to emphasis progress that has been made on reducing inflation.
Annual inflation fell to 2.5 percent in June, the Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, reported last week. That is down from 2.6 percent the previous month and the lowest since February 2021, when inflation was just starting to accelerate.
One hopeful sign is the cooling of rental prices, which is a key producer of broader inflation. Rental inflation was a leading example of what economists call “catch-up” inflation, in which in which prices were still rising this year because of distortions from the pandemic economy. Many Americans sought more living space or moved out on their own during COVID-19, pushing up the cost of rents and homes. Another example of “catch-up” inflation is car insurance, which spiked by more than 20 percent earlier this year from a year ago, as insurance companies have charged more to reflect the pandemic-era increases in new-car prices. Yet even these costs have started to rise more slowly.
Both hiring and wage growth have slowed in recent months. Fed Chair Jerome Powell told Congress on July 12 that the labor market "appears to be fully back in balance," meaning that the supply of available workers roughly matches hiring demand, Investor’s Business Daily reported. As a result, the labor market is "not a source of broad inflationary pressures for the economy now," he said.
On July 30, the government released a quarterly measure of wage growth, which showed that paychecks, while still growing at a healthy pace, are not growing as fast as three months ago, adding to evidence that inflationary pressures have eased.