The Federal Reserve held interest rates steady on Wednesday but U.S. central bank chief Jerome Powell said policymakers may be ready to reduce borrowing costs as soon as their next meeting in September, with recent data adding to their confidence that inflation is coming into line with their 2% target.

Powell’s remarks at his press conference following the end of the Fed’s latest two-day policy meeting appeared as an affirmation of a coming pivot in September that was partly reflected in the central bank’s new policy statement.

“There has been some further progress toward the Committee’s 2% objective,” the policy-setting Federal Open Market Committee said in the statement after deciding to keep the central bank’s benchmark overnight interest rate in the 5.25%-5.50% range.

Powell went further, telling reporters “there is a growing sense of confidence that you could move at the next meeting” as long as coming inflation data affirms its recent softening trend.

The central bank uses the personal consumption expenditures price index for its 2% annual inflation target. The PCE price index rose 2.5% in June after exceeding 7% in 2022, and the month-to-month readings recently have shown it even closer to target.

Investors saw Powell’s comments as clearly setting the stage for a reduction in borrowing costs at the Fed’s Sept. 17-18 meeting, just seven weeks shy of the Nov. 5 U.S. elections.

“Listening to him speak, it’s clear they’re all locked and loaded for September rate cut and they’re going to maintain their optionality,” said Mark Malek, chief investment officer at SiebertNXT.

Interest rate futures, stocks and Treasury bonds all rallied hard on Powell’s remarks, so much so that the probability of a first cut in September being as large as half a percentage point jumped to about 15%, according to CME Group’s FedWatch tool. Powell, however, said a 50-basis-point cut was not something under active consideration.

Dual mandate

While Fed officials are wary of any actions that could mar their data-not-politics approach to setting monetary policy, the steady drop in inflation in recent months prompted a broad consensus that the inflation battle was near an end.

Inflation, the Fed said, was now just “somewhat elevated,” a key downgrade from the assessment that it has used throughout much of its battle against rising prices that it was “elevated.”

“We have made no decisions on future meetings” when it comes to rate cuts and all policy decisions will be made on a meeting-by-meeting basis, Powell said at his press conference. But he added that as Fed officials have been gaining confidence that price pressures are moderating, “the economy is moving closer to the point where it will be appropriate to reduce our policy rate.”

The Fed’s policy statement also removed standing language that it was “highly attentive to inflation risks,” and replaced it with an acknowledgement that policymakers were now “attentive to the risks to both sides of its dual mandate,” which includes a charge from Congress to maintain maximum employment consistent with stable prices.

U.S. central bankers have said it would be appropriate to reduce borrowing costs before inflation actually returns to their target to account for the time it takes monetary policy to affect the economy.

So far the economy “has continued to expand at a solid pace,” the Fed said in its statement, and while “job gains have moderated,” the unemployment rate “remains low.”

But the jobless rate has been rising, and policymakers have put more focus of late on avoiding the sort of sharp rise in unemployment often associated with high interest rates and slowing inflation.

The Fed did not commit in its statement to a rate cut in September, and repeated that policymakers still need “greater confidence that inflation is moving sustainably toward 2%” before lowering borrowing costs.

But the changes seem consistent with that confidence being reached by September, something investors have been expecting. The Fed raised rates aggressively from March 2022 to July 2023, hiking the benchmark rate by 5.25 percentage points to combat the worst outbreak of inflation in 40 years.

The new policy statement was approved unanimously.

—Howard Schneider, Reuters

Lindsay Dunsmuir, Ann Saphir, Michael S. Derby and Chibuike Oguh contributed to this report.