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A few key words in Fed boss Jerome Powell's speech signals when interest rates are coming down
The Federal Reserve has held interest rates steady for the sixth consecutive time, but hinted it is closer to cuts.
Fed Chair Jerome Powell said an interest rate cut could be possible next month, and the central bank made notable changes to its policy statement, indicating that inflation is getting closer to its 2 percent target.
Stocks rallied following the announcement, in good news for American 401(K) accounts.
The central bank has kept interest rates between 5.25 percent and 5.5 percent for the past year. This range sets a guidepost for rates for credit card, mortgages and other consumer debt products affecting household budgets.
Markets had been looking for signs that the Fed will begin cutting rates next month for the first time in more than four years.
The Federal Reserve has held interest rates steady for the sixth consecutive time, but hinted it is closer to cuts (Pictured: Chair Jerome Powell speaking at a press conference following the announcement)
The Federal Reserve has held interest rates between 5.25 and 5.5 percent at its latest meeting
Speaking at a press conference following the announcement, Powell said: 'We have made no decisions about future meetings and that includes the September meeting.
'The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate.'
He said that this decision would be data dependent, but not a question of responding specifically to one or two data releases.
'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.
'If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.'
The central bank also made significant tweaks to its policy statement, but stopped short of making any explicit commitment to lowering interest rates in September.
The policy statement described inflation as 'somewhat elevated,' a downgrade from previous months, and said there had been 'further progress toward the Committee's 2 percent inflation objective.'
In June, the Fed said that only 'modest' progress had been made toward bringing down inflation, which hit 40-year highs two years ago.
'The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance,' the policy statement read.
This is an upgrade from previous language, moving the commitments to bringing down inflation and maintaining a healthy labor market onto a more equal footing.
This shift is significant as it suggests inflation may no longer be an obstacle to lowering rates, particularly if the labor market continues to cool.
At the press conference, Powell added: 'We've had this really significant decline in inflation and unemployment has remained low. And this is a historically unusual and such a welcome outcome for the people we serve.
'What we're thinking about all the time is how do we keep this going, and this is part of that. We don't need to be 100 percent focused on inflation because of the progress we've made.
'The job is not done on inflation but nonetheless we can afford to begin to dial back the restriction in our policy rate.'
It comes following a raft of encouraging data sets around inflation and the health of the US economy.
The annual rate of inflation was 3 percent in June, falling 0.1 percent month on month from May.
The US economy also accelerated last quarter, with consumers and businesses increasing their spending despite the continual pressure of high interest rates.
Economists said that this could mean the economy is on track to stick a so-called 'soft landing' which is good news for the stock market.
This rare slowdown is when the rate of inflation returns to the Federal Reserve's 2 percent target without triggering a recession.
'There's been a shift in the Fed's tone,' said eToro US Investment Analyst Bret Kenwell.
'While the Fed's main focus has been on bringing inflation back to its 2 percent target, its attention is shifting to the labor market - and rightfully so -as the jobs market has softened in recent months.'
Stocks rose following the announcement, in good news for 401(K) accounts
The annual rate of inflation was 3 percent in June - above the Fed's 2 percent target
GDP rose at an annual rate of 2.8 percent for the quarter from April through June 2024
Stocks rose following the announcement, with the S&P 500 jumping 1.9 percent, the Nasdaq adding 2.9 percent and the Dow Jones Industrial Average adding 422 points, or around 1 percent.
A strong stock market is good for 401(K)s and other retirement accounts - which are mostly invested in these major indices or in shares of individual US companies like Apple.
A rate cut would be good news for consumers, as elevated interest rates have kept borrowing costs high and put pressure on household budgets.
Credit card rates, for example, change in-line with the Fed's benchmark figure, so would quickly reflect a cut and provide some respite for borrowers.
Car loans, student loans, and mortgages, are not directly influenced by the benchmark rate, but would be affected in turn.
The rates offered on 30-year fixed-rate mortgages, for example, track the yield on 10-year Treasury bonds.
The bonds are influenced by several factors including predictions around inflation, Fed actions and investor reactions as a result.