The Federal Open Market Committee (FOMC) – the policy setting arm of the Federal Reserve – voted unanimously to hold interest rates unchanged at their current 5.25% – 5.5% target in July.

Diane Swonk, chief economist and managing director with KPMG Economics, said the statement following the decision was more hawkish than many market participants hoped. There were only minor edits to the language regarding progress on inflation and the prospects for rate cuts.

However, she noted the line in the statement regarding risks was tweaked and made more revealing about where the Fed is headed. Instead of saying that the Fed remains “highly attentive to inflation risks,” it now says, “is attentive to the risks to both sides of its dual mandate.”

Swonk wrote:

That shift reflects the Fed’s concern that it could overtighten and miss hitting its mark on a soft landing. Chairman Jay Powell had laid out his concerns earlier in the month in testimony to Congress. When pushed on the Fed’s dual mandate – to foster price stability and full employment – and the risk that it could inadvertently overtighten, Powell responded, “It’s the number one risk” that keeps him up at night.

Chairman Powell went further in his statement as he opened the press conference following the meeting. He said that if inflation fell faster or unemployment rose more than expected, the Fed would move.

The Fed is widely expected to cut in September. Powell was pushed on why the Fed did not cut today, given where the Fed is today. He emphasized that the Fed just needs more good evidence on inflation improving. The Fed does not want to find itself in the position that the European Central Bank now finds itself, which is a monetary policy purgatory. It cut before the Fed in June, only to be humbled by stickier service sector inflation thereafter. That has left it in an uncomfortable holding pattern, unable to commit to cutting again in September. Powell said that the Fed will be “data dependent but not data point dependent” in its decisions. This is important, as financial market participants tend to react to each individual data point instead of taking the data in its totality.

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