The Federal Reserve says progress has been made in reducing inflation to its 2.0 per cent target, a sign that the US central bank is moving closer toward cutting its key interest rate for the first time in four years.

In a statement issued after it concluded its two-day meeting, the Fed also said that “job gains have moderated” and acknowledged that the unemployment rate has risen.

The Fed is required by Congress to pursue stable prices and maximum employment, and the statement said the US central bank is “attentive to the risks” to both goals, a shift after several years of focusing exclusively on combating inflation.

Fed policymakers also chose to keep their key rate at a 23-year high of 5.3 per cent even as many Democratic elected officials and some economists have pushed for lower rates to bolster the economy and prevent job cuts.

Republicans, including former president Donald Trump, have argued that a rate cut before the election would appear politically motivated.

Before the Fed’s decision, financial market traders had priced in 100 per cent odds that the central bank will reduce its benchmark rate at its September 17-18 meeting, according to futures markets.

The Fed typically seeks to avoid surprising investors with its rate decisions.

The Fed is seeking to strike a delicate balance: it wants to keep rates high enough for long enough to quell inflation, which has fallen to 2.5 per cent from a peak two years ago of 7.1 per cent, according to its preferred measure.

But it also wants to avoid keeping borrowing costs so high that it triggers a recession.

So far, it is on track for a so-called “soft landing,” in which inflation falls to 2.0 per cent without a recession.

Yet with the unemployment rate ticking higher for three months in a row, some economists have raised concerns that the Fed should have cut rates on Wednesday or should cut them more quickly later this year.

In the latest piece of good news on price increases, last Friday the government said that yearly inflation fell to 2.5 per cent in July, according to the Fed’s preferred inflation measure – down from 2.6 per cent the previous month and the lowest since February 2021, when inflation was just starting to accelerate.

At the same time, the unemployment rate has risen by nearly a half-percentage point this year to a still-low 4.1 per cent and hiring has slowed.

Powell and other Fed officials have highlighted they are increasingly focused on the risk that the job market could falter, another reason markets expect rate cuts soon.

The government will issue the latest jobs numbers this Friday, and economists forecast that it will say employers added 175,000 jobs in July while the unemployment rate remained 4.1 per cent.

This post was originally published on Michael West.