MNI: Fed Holds Rates; Flags Inflation Progress, Weaker Jobs

The Federal Reserve kept interest rates on hold for an eighth straight meeting Wednesday but flagged progress on inflation and concerns about the employment outlook, a possible sign that policymakers are coalescing around the idea of a September rate cut. 

The Fed left its forward guidance saying it did not expect it would be appropriate to start lowering borrowing costs “until it has gained greater confidence” inflation is moving back to the 2% target.

But the central bank did nod to recent improvements in inflation and some softening in the job market, indicating officials are increasingly open to rate cuts.

"There has been some further progress toward the committee’s 2% inflation objective," the Fed said in its statement, dropping the word “modest” from the June version of the statement.

“Inflation has eased over the past year but remains somewhat elevated,” the statement continued, with the addition of the word “somewhat” again pointing to a better inflation picture.

BOTH SIDES

Policymakers also shifted to saying they were attentive to both sides of their dual mandate, as opposed to "highly attentive" to inflation risks in June.  

As for jobs, the FOMC said gains have moderated and the unemployment rate “has moved up but remains low,” a change from June description saying only that it “has remained low.”

Investors have fully priced in the prospect of a September rate cut from the U.S. central bank, expecting the Fed will go out of its way to stay out of the political fray in an election year and make policy moves based solely on the data. 

Wednesday’s decision comes after a string of benign readings on inflation and amid signs that the labor market, while still robust, is showing some signs of fraying. 

The Fed's preferred PCE measure of inflation rose 2.5% in the year to June, not far from the central bank's 2% target. Signs of moderating price pressures have been widespread, ranging from softer wage growth to easing service sector price growth. 

The unemployment rate, meanwhile, has risen to 4.1% from a cycle low of 3.4%, prompting policymakers to increasingly focus on the risk of a worsening spike in joblessness. Other measures of employment ranging from quits and hires rates to weekly unemployment benefit claims have corroborated the trend. 

Data Wednesday showed the closely-watched Employment Cost Index climbing just 0.9% in the second quarter versus a rise of 1.2% in the first three months of the year.