**Summary**
- The central bank maintains its policy rate at 5.25%-5.50%.
- Investors anticipate a potential rate cut in September.
- The Fed's next meeting will occur seven weeks before the U.S. elections.
- Powell emphasizes that decisions will be based on economic data, not political considerations.
**WASHINGTON, July 31 (Reuters)** — Federal Reserve Chair Jerome Powell indicated Wednesday that interest rates might be reduced as early as September if economic conditions align as expected, signaling a possible end to the central bank's more than two-year effort to combat inflation, while positioning the Fed in the midst of the presidential election cycle.
Following its latest two-day policy meeting, the Fed decided to keep the benchmark interest rate unchanged in the 5.25%-5.50% range. However, the Fed's statement softened its language on inflation and acknowledged that risks to employment are now as significant as those related to rising prices, potentially paving the way for a rate cut.
In his post-meeting press conference, Powell highlighted the broad easing of price pressures in the economy, describing it as "quality" disinflation. He suggested that if inflation continues to trend as expected and economic growth remains strong, a rate cut could be considered at the September meeting.
Republican lawmakers had cautioned Powell in July that a rate cut at the Sept. 17-18 meeting, just before the U.S. elections, could be perceived as a politically motivated move, aimed at showcasing inflation progress and offering the prospect of lower credit costs and mortgages.
Powell responded that the Fed's decisions are based solely on economic data and the progress toward the 2% inflation target, not on political considerations. He noted that while some policymakers discussed the potential for a rate cut during this meeting, the consensus was to wait for more data before making a decision.
**SETTING THE STAGE**
Powell's comments reinforced investor expectations of a potential rate cut in September, shifting from a period of restrictive interest rates to a more gradual easing of credit policy, aimed at reducing inflation to the 2% target without harming the labor market.
The Fed's updated policy statement reflects a more optimistic outlook, recognizing "further progress" toward its inflation goal and noting that the unemployment rate remains low at 4.1%. The personal consumption expenditures (PCE) price index, the Fed's preferred inflation measure, increased by 2.5% in June, down from over 7% in 2022, with recent readings approaching the target.
Investor confidence surged following Powell's remarks, with interest rate futures, stocks, and Treasury bonds experiencing significant rallies. The probability of a 50-basis-point cut in September rose to about 13% from 5% before Powell's speech. However, Powell clarified that a 50-basis-point cut is not currently under active consideration.
While the Fed aims to avoid any actions that could be perceived as politically motivated, the steady decline in inflation has led to a general consensus that the inflationary period may be concluding. The Fed's statement reflected a shift from describing inflation as "elevated" to "somewhat elevated," and acknowledged the dual mandate of maintaining maximum employment while ensuring stable prices.
The Fed's statement also indicated that while job gains have moderated, the unemployment rate remains low. Policymakers are now focused on avoiding significant unemployment spikes that typically accompany high interest rates and slowing inflation.
