Fed holds interest rates steady at 23-year high, but opens the door to reducing rates

The Federal Reserve on Wednesday held interest rates steady at the highest level in more than two decades, but hinted that recent progress on inflation could soon prompt policymakers to reduce borrowing costs.

The widely expected decision left interest rates unchanged at a range of 5.25% to 5.5%, where they have sat since last July.

Fed policymakers made several key changes to the statement released after their two-day meeting in Washington. Officials described inflation as "somewhat elevated," a notable shift from previous statements when they called it "elevated." The statement also said that central bank officials are focused on employment and inflation risks, rather than just inflation risks.

"The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance," the statement said. "The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate." 

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Still, policymakers left language in the statement that suggested they need "greater confidence" inflation is coming down before easing policy. Investors are still pricing in a 100% chance of a rate reduction when policymakers next meet on Sept. 17-18.

Fed Chair Jerome Powell also told reporters at a post-meeting press conference that while no decision has been made regarding the September meeting, it is possible officials would cut rates if the economic data showed inflation continuing to ease.

"If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September," he said.

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Policymakers raised interest rates sharply in 2022 and 2023 in a bid to slow the economy and cool inflation. Officials are now grappling with when they should take their foot off the brake. They entered 2024 expecting to reduce rates at least three times this year, but have repeatedly pushed back their plans, even though inflation eased in April, May and June.

Higher interest rates tend to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates helped to push the average rate on 30-year mortgages above 8% for the first time in decades last year. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.

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Yet the rapid rise in rates has not stopped consumers from spending or businesses from hiring. The labor market is continuing to chug along at a healthy pace, with employers adding 206,000 new workers in June. Job openings remain high, and the unemployment rate is hovering around 4.1%.