The US Federal Reserve has held interest rates

Federal Reserve Chair Jerome Powell indicated on Wednesday that interest rates might be lowered as early as September if the U.S. economy progresses as anticipated. This decision positions the central bank near the conclusion of a prolonged fight against inflation, spanning over two years, and coincides with the lead-up to the country's presidential election.

The Fed concluded its latest two-day policy meeting by maintaining its benchmark interest rate in the 5.25%-5.50% range established a year ago. However, the statement issued by the Fed softened its language on inflation, indicating that the risks to employment are now comparable to those of rising prices. This neutral stance suggests the possibility of lowering rates after an extended period of tightening credit.

During the post-meeting press conference, Powell emphasized that inflationary pressures were diminishing across the economy—a phenomenon he described as "quality" disinflation. He stated that if forthcoming data align with expectations, there would be growing support for a rate cut. "If we see inflation moving down in line with expectations, growth remains reasonably strong, and the labor market stays consistent with current conditions, then a rate cut could be considered at the September meeting," he said.

Republican lawmakers had previously cautioned Powell in a July hearing that a rate cut at the September 17-18 meeting, just weeks before the U.S. elections, could be perceived as politically motivated. They highlighted the progress on inflation and the potential positive impact of lower credit costs and mortgage rates. However, Powell asserted that the Fed's decisions are based solely on economic conditions and the progress toward its 2% inflation target, regardless of political considerations.

Powell revealed that some Fed policymakers had discussed the rationale for a rate cut during the current session, but the consensus was to potentially consider it at the next meeting, depending on forthcoming data.

Powell's statements on Wednesday solidified investor expectations that the Fed would shift in September from a period of restrictive interest rates to a gradual easing of credit policy, aiming to achieve the 2% inflation target without significantly harming the labor market. He expressed confidence in achieving a "soft landing," with data indicating a stable economy that is neither weak nor overheating.

The Fed's updated policy statement acknowledged "some further progress toward the Committee's 2% objective," and noted that the unemployment rate, currently at 4.1%, "remains low." The central bank uses the personal consumption expenditures price index for its 2% inflation target, which rose by 2.5% in June, down from over 7% in 2022, with recent month-to-month figures showing it even closer to the target.

Investors interpreted Powell's comments as a clear signal that borrowing costs could be reduced at the Fed's September 17-18 meeting.