On Wednesday, July 31st, the Federal Reserve maintained its federal funds rate target range unchanged at 5.25%-5.50% for the eighth consecutive time, following which Fed Chairman Powell stated at a press conference that a rate cut in September is "possible and in consideration", and the committee's consensus is gradually approaching a rate cut.

Powell stated that he is concerned about the risks on both aspects of the dual mandate. There is a need for greater confidence in inflation. The second-quarter inflation data has strengthened confidence in inflation.

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In the FOMC decision statement, Fed officials did not explicitly indicate that a rate cut is imminent, instead choosing to continue to use language that expresses continued concerns about the economic situation, despite some progress. They also retained a statement that more progress is needed before a rate cut.

The Federal Open Market Committee stated in a post-meeting statement: "The Committee determines that the risks continue to tend towards a more balanced achievement of employment and inflation objectives." This statement was slightly upgraded from previous formulations.

The statement further states, "Over the past year, inflation has moderated but still increased slightly. In recent months, the committee has made some progress in achieving the 2% inflation target."

(Image source: CNBC)

This language is also an upgrade from the June meeting, when the policy statement indicated only "modest" progress in reducing price pressures, and two years ago, price pressures were at their highest level since the early 1980s. The previous statement also described inflation as "elevated", rather than "slightly elevated."

In addition, the Fed made some other adjustments, unanimously voting to maintain the benchmark overnight borrowing rate between 5.25% and 5.5%, the highest level in 23 years. This rate has been maintained for the past year, and the Fed has previously raised it 11 times to reduce inflation.

One change indicates that committee members "are concerned" about risks to full employment and low inflation, removing the word "high" from its June statement.

The market has been looking for signs that the Fed will cut rates at its September meeting, with futures pricing suggesting further cuts in November and December assuming a rate cut of a quarter percentage point.

However, an important sentence in the statement that expresses the Fed's intentions remains: "The Committee believes that it is not appropriate at this time to reduce the target range until there is more confidence that inflation will be sustained at the 2% level."

This sentence highlights the Fed's reliance on data. Officials have emphasized that they will not act along preset lines or be guided by forecasts.

Recent economic data suggests that price pressures are far below the peak in mid-2022 when inflation reached its highest level since the early 1980s.

The Fed's preferred gauge shows an annual inflation rate of about 2.5%, while other indicators show slightly higher rates of inflation. The Fed has set a 2% inflation target and has been committed to it, although some have called for it to tolerate higher levels of inflation.

Despite maintaining the most restrictive monetary policy in decades, the economy continues to expand.

Driven by consumer and government spending as well as inventory replenishment, the quarterly GDP growth rate rose by 2.8% year-on-year, far exceeding expectations.

(Image source: CNBC)

The labor market data is slightly weak, but the unemployment rate of 4.1% is far from the full employment level that economists believe. The Fed's statement pointed out that the unemployment rate "has risen slightly, but it is still low." On Wednesday, private employment data processing company ADP released data showing that the private sector added only 122,000 jobs in July, indicating that the labor market may be weakening. However, the ADP report also had some positive inflation data, with wage growth at its lowest rate in three years. On Wednesday, the US Department of Labor also reported that wage, benefit, and salary costs in the second quarter increased only 0.9%, lower than expected and the 1.2% level in the first quarter.

Although there are signs that inflation is weakening, people are worried that the economy cannot withstand the highest borrowing costs in 23 years for a long time, and Fed officials still vow to be cautious. On Wednesday, another economic report showed that sales of homes for sale in June soared by 4.8%, exceeding the expected 1%, further consolidating the Fed's position.

The signs of deflation are beginning to pervade the US economy, which has strengthened market confidence in the rate cut in September. However, the overall economy continues to show strong momentum. Unexpected data such as second-quarter GDP and July S&P Global PMI released last week highlighted this point.

Market reaction:

After Fed Chairman Powell's speech, spot gold erased its post-FOMC statement decline and rose to $2,430. The S&P 500 index and the Nasdaq 100 index rose to intraday highs during Powell's speech.

After Powell's speech, spot gold erased its decline following the statement and is now trading at $2,431.26/ounce as of press time.

(Spot gold 30-minute trend chart source: FX168)

The US dollar index fell back slightly after the FOMC statement to $103.20.

(US Dollar Index 30-minute trend chart source: FX168)

The statement retains a key sentence indicating the Fed's intention: "The Committee believes that it is inappropriate to reduce the target range until it has greater confidence that inflation will sustainably move toward 2%."

(Standard & Poor's 500 Index 30-minute trend chart, source: FX168)