The easing of inflation measures announced Wednesday removed one of the final hurdles the Federal Reserve needed to clear before cutting interest rates in September.
The Consumer Price Index (CPI) rose 2.9% year-on-year in July, down from a 3% year-on-year increase in June. On a “core” basis, which excludes highly volatile costs such as food and gasoline, prices rose 3.2% year-on-year in July, down from 3.3% in June. This was the smallest increase since April 2021.
“I think this report will give the Fed a green light for its policy decision in September,” Nathan Sheets, global chief economist at Citigroup, told Yahoo Finance.
The new figures are the latest evidence that inflation is indeed cooling again after rising again in the first quarter of this year, a development that led the Fed to briefly warn that interest rates were likely to remain higher for longer.
Fed Chairman Jerome Powell said late last month that a rate cut in September was “on the table” if data supported it, and he and other policymakers have said they want to see inflation actually falling “durably” toward the central bank’s 2% target.
Federal Reserve Chairman Jerome Powell. (Reuters/Evelyn Hochstein) (Reuters/Reuters)
“It’s just a matter of seeing better data,” Powell said at a press conference on July 31. “I just want to see more data and have more confidence.”
Traders are currently expecting a 100% chance of some kind of rate cut in September, with the odds of a 50 basis point cut and a 25 basis point cut currently sitting at roughly 50/50, according to the CME FedWatch tool.
“I don’t think there’s any debate that the Fed will cut rates in September,” Kelsey Bello of JPMorgan Chase (JPM) told Yahoo Finance earlier this week.
“What we’re really discussing is [whether or not it’s] Will be [a] 25 or…50 [basis point rate cut]”Added Bello, global fixed income asset portfolio manager.
Read more: How the Federal Reserve’s interest rate decision will affect your bank accounts, CDs, loans and credit cards
The Federal Reserve will consider two more key pieces of data before it meets in Washington, DC on September 17-18.
One is the release of the core personal consumption expenditures (PCE) index, the Fed’s preferred inflation measure, on August 30, and the other is the employment report from the Bureau of Labor Statistics on September 6.
The employment data will help the Fed decide whether its first rate cut will be small or large.
The latest jobs report showed new signs of a cooling labor market, raising concerns that the Fed may have waited too long to start cutting interest rates after keeping them at their highest level in 23 years for the past year.
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The unemployment rate rose to 4.3% in July, the highest level since October 2021. The U.S. economy added 114,000 nonfarm payrolls in July, below the 175,000 that economists had expected.
Some Fed watchers say the central bank should have decided to cut interest rates for the first time in four years at its July meeting to get ahead of a slowing U.S. economy before it slid into recession.
Those criticisms grew louder last week amid the stock market’s worst one-day crash since 2022.
On the other hand, some say the Fed is still where it needs to be.
Read more: Fed forecast for 2024: Experts discuss chances of rate cut
“The Fed may say in hindsight that it was late, but I don’t think it was that late,” Rob Kaplan, vice chairman at Goldman Sachs, told Yahoo Finance earlier this week. “If it was late, it would only be a meeting or two. It would end up being tactical.”
One Fed official, Atlanta Fed President Raphael Bostic, said on Tuesday, ahead of the latest CPI report, that he wanted to see “a little more data” before cutting rates.
He wants to ensure that the Fed doesn’t risk a resurgence in inflation by cutting rates too early, while at the same time making sure the job market doesn’t get “freezing cold.”
“We’re going to wait, but it’s coming … it’s already here,” Bostic said.
“The Fed should cut rates,” Mark Zandi, chief economist at Moody’s Analytics, told Yahoo Finance on Wednesday after the release of the Consumer Price Index (CPI) report.
“I think they should have cut rates a few months ago, but I think this is clear evidence that inflation is back on target.”
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