The Federal Reserve hinted early in the morning that they are one step closer to cutting interest rates and for the first time this year, provided a specific time frame for a possible rate cut. Federal Reserve Chairman Powell stated at a press conference after the meeting, "At the next meeting in September, there may be a reduction in the policy rate."

Key points of the overnight meeting of the Federal Reserve

Officials made two important changes to the policy statement, acknowledging progress in fighting inflation and showing a greater inclination toward cutting interest rates without making any clear commitment.

The statement said, "The committee is concerned about both sides of its dual mandate." The shift is significant because it suggests inflation may no longer be a barrier to cutting rates, particularly as the labor market continues to cool.

Federal Reserve officials raised the benchmark interest rate to around 5.3% in July 2023, the highest level in 20 years, and have been mostly focused on when to begin cutting rates this year. Powell said, "The committee's general view is that the economic situation in the United States is approaching an appropriate time to lower policy rates."

This is crucial for Federal Reserve officials, as they have been trying to deal with two major risks. One is that they have eased too quickly, making inflation above their 2% target entrenched. The other is that they have waited too long, and the economy has collapsed under the weight of high interest rates.

One change noted that committee members are concerned about risks to both full employment and low inflation, deleting the word "highly" from the June statement. However, the statement retained a key sentence about the Fed's intentions: "The committee believes that it is inappropriate to reduce the target range until it is more confident that inflation is steadily advancing toward 2%."

This sentence highlights the Fed's dependence on data. Officials insist they have not adjusted rates along a preset path, nor will they be guided by forecasts.

In the first half of the year, the broadest measure of US economic output, real GDP, grew at an annual rate of 2.1%. While inflation was surprisingly high in the first quarter, recent data show the trend of slowing price growth last year has resumed and may be expanding.

Recent economic data show that price pressures are much lower than the peak in the middle of 2022, when inflation reached its highest level since the early 1980s.

The Personal Consumption Expenditures Price Index (PCE), which the Fed favors, shows an annual inflation rate of around 2.5%, but other indicators show slightly higher inflation rates, such as the CPI. The Fed has set a 2% inflation target and has consistently insisted on sticking to that target, although some argue that the central bank should tolerate higher pressures in some areas.

In terms of employment, while layoffs remain low, recruitment rates have also declined significantly. Workers are taking longer to find jobs, and the unemployment rate rose slightly from 3.7% at the beginning of the year to 4.1% in June. When asked whether officials were worried that this might be a sign of further weakness in the labor market, Powell said, "We are closely monitoring this."

After several years of hiring spree, wage growth is cooling off. The US Labor Department announced on Wednesday that wages and salaries in the private sector grew by 0.8% in the second quarter, the slowest increase since 2020.

Earlier Wednesday, employment data also hinted at a slowdown and supported the central bank's efforts to lower inflation. According to the latest report from ADP, private-sector employment growth in July slowed further, and wage growth slowed to its lowest level in three years.

In addition, some of the industries most sensitive to interest rates are facing greater pressure. After a surge in borrowing costs, the number of houses under construction in the United States stabilized in 2022, but residential construction turned negative earlier this year, falling nearly 8% year on year in June, the largest decline since the bursting of the housing bubble in 2006-11.

The American Bankers Association of Mortgage, said on Wednesday that mortgage rates had fallen to less than 7% in recent weeks, but this had not boosted demand for new mortgages.

"The U.S. Securities and Exchange Commission (SEC) and other regulatory agencies are concerned about this incident and may conduct a deeper examination of NYSE's operations and crisis management mechanisms. Market analysts expect that such technical failures may prompt regulatory agencies to strengthen their supervision and requirements for exchange technology infrastructure."

The market has been looking for signs that the Fed will cut interest rates at its next meeting in September, and it has moved one step closer to that goal. Futures prices show that assuming a 0.25 percentage point cut each time, the Fed is likely to cut rates further at the November and December meetings. After Powell's speech, the US stock market rebounded to its highest level of the day.

The S&P 500 rose 1.58% to close at 5,522.30, while the Nasdaq Composite rose 2.64% to close at 17,599.40. This was the best trading day for both indexes since February.

The global commodity market also rose significantly overnight as lower rates reduce borrowing costs, making it cheaper for investors and companies to hold and invest in commodities, increasing demand. In addition, lower interest rates typically lead to a weaker US dollar, and most commodities (such as crude oil, gold, etc.) are priced in USD. The weaker dollar makes these commodities cheaper for investors holding other currencies, stimulating demand and pushing commodity prices higher. Lower rates also increase liquidity in the market, leading to more funds flowing into the commodity market and pushing up prices.

The Fed is using today's statement to prepare the market for an upcoming rate cut. Some analysts believe that as inflation improves and unemployment rises, the Fed can cut rates while keeping nominal fund rates higher than inflation. "The market may respond positively to this subtle change in tone."

Investors generally believe that the Fed's interest rate cut will help alleviate global economic pressure, especially in the face of some uncertainty. Some economists point out that the Fed's move may trigger more other central banks to take similar measures to maintain the synchronization of monetary policies.

In addition, a senior economist at the IMF once stated: "The Fed's interest rate cut may provide some breathing room for emerging markets, easing the pressure of capital outflows."

The business community often responds positively to the Fed's interest rate cut expectations. Many companies believe that lower interest rates will reduce borrowing costs, stimulate investment and expansion. Especially in the technology and manufacturing sectors, companies expect the interest rate cut to bring in more capital investment, promoting innovation and productivity improvement.

The financial industry is also optimistic about the interest rate cut. Banks and investment institutions expect the interest rate cut to drive loan demand and increase financial activity. Overall, the Fed's latest meeting statement and Powell's overnight speech undoubtedly have a significant positive impact on the market.

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