Moderate inflation gives Fed ‘green light’ to cut rates in September

A more moderate inflation reading released Wednesday clears one of the last hurdles the Federal Reserve had to clear before cutting rates in September.

The consumer price index (CPI) rose 2.9% from a year earlier in July, down from the 3.0% annual increase recorded in June. On a “core” basis, which excludes the more volatile costs of food and gasoline, prices in July were up 3.2% from a year earlier, down from 3.3% in June. This was the smallest increase since April 2021.

“I think this report is a green light for the Federal Reserve in September,” Nathan Sheets, global chief economist at Citigroup (C), told Yahoo Finance.

The new figures are the latest confirmation that inflation is actually slowing again after rising in the first quarter of the year, a development that prompted the Fed to warn at one point that rates would likely stay higher for longer.

Fed Chairman Jerome Powell made clear late last month that a September rate cut was “possible” if the data justified it. He and other policymakers have said they want to make sure inflation actually comes down “sustainably” toward their 2% target.

“It’s just a matter of getting more good data,” Powell said at a July 31 news conference. “We just want to see more and gain confidence.”

Traders are currently betting on a 100% chance of a rate cut in September. The odds of a 50 basis point or 25 basis point cut are now roughly 50/50, according to the CME FedWatch tool.

“I don’t think there’s really any debate about the Fed cutting rates in September,” Kelsey Berro of JPMorgan Chase (JPM) told Yahoo Finance earlier this week.

“What we are really debating is [whether or not it’s] will be [a] 25 or… 50 [basis point rate cut]”, added Berro, who is a portfolio manager for global fixed income assets.

The Fed will have to consider two other important data sets before its September 17-18 meeting in Washington, DC.

One is a reading of the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) index – from August 30 and the second is a jobs report from the Bureau of Labor Statistics from September 6.

The jobs data will likely help the Fed decide whether its first cut will be small or large.

The latest jobs report offered fresh signs of a slowing labor market, fueling concerns that the Fed may have waited too long to start cutting interest rates after keeping them at a 23-year low last year.

In July, the unemployment rate reached 4.3%, its highest level since October 2021. The U.S. economy created 114,000 nonfarm payrolls in July, less than the 175,000 expected by economists.

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Some Fed watchers say the central bank should have decided at its July meeting to cut rates for the first time in four years, to get ahead of the slowdown in the U.S. economy before it slips into recession. That criticism has intensified over the past week amid the global economic crisis.