Federal Reserve Chairman Jerome Powell said central bank officials will cut interest rates in September unless progress on inflation stalls, and mentioned the risk of further weakness in the labor market.

Powell said policymakers were close to cutting borrowing costs from more than two-decade highs, underscoring the Fed’s growing confidence it can ease restrictions on the economy, though he would not rush officials into agreeing to a rate cut if price data disappoint in coming months.

William Dudley, former president of the Federal Reserve Bank of New York, said the changes in the Fed's statements and press conferences basically tell you that a September rate cut will happen unless there is a major change in the economic outlook.

The Federal Open Market Committee (FOMC) on Wednesday kept the federal funds rate in a range of 5.25% to 5.5%, a level it has maintained since July of last year.

"The question is whether the totality of the data, the changing outlook and the balance of risks is consistent with rising confidence in inflation and a solid labor market, and if the answer is yes, then we could be moving toward lowering rates as early as September," Powell told reporters on Wednesday.

The language of the rate statement was tweaked a bit after Powell’s comments, highlighting policymakers’ growing concerns about excessive slack in the labor market, a sharp turn away from more than two years of intense focus on inflation.

“The economic outlook is uncertain, and the Committee is monitoring risks to its dual mandate on both sides,” policymakers wrote, compared with previous language that focused only on inflation risks.

Powell believes that the labor market is solid but slowing. Hiring has slowed and the unemployment rate has risen to 4.1%, the highest level since 2021, but it remains low. Layoffs are still small.

But he said the Fed does not need to ease policy further to achieve its 2% inflation target.

Powell said at a press conference that inflation has indeed come down significantly and unemployment remains low. He added that this is an unusual and welcome result. What we have been thinking about is: How can this be sustained?

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