A milder inflation reading released Wednesday removes one of the last hurdles the Federal Reserve needed to clear before cutting rates in September. The Consumer Price Index (CPI) increased 2.9% over the prior year in July, down from June’s 3% annual gain in prices. On a “core” basis, which strips out the more volatile costs of food and gas, prices in July climbed 3.2% over last year — down from 3.3% in June. That 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 for Citigroup, told Yahoo Finance. The new numbers are the latest confirmation that inflation is in fact cooling once again after heating back up during 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 Chair Jerome Powell made it clear at the end of last month that a cut in September was “on the table” as long as the data supported it. He and other policymakers have said they want to be sure that inflation is in fact moving “sustainably” down to their 2% goal.
“It’s just a question of seeing more good data,” Powell said at a press conference on July 31. “We just want to see more and gain confidence.” Traders are currently betting there is a 100% chance of some type of cut in September. The odds of a 50 basis point cut or a 25 basis point cut are now split roughly 50/50, per the CME FedWatch Tool.
“I don’t think there’s really any debate that the Fed is cutting in September,” JPMorgan Chase’s Kelsey Berro told Yahoo Finance earlier this week. “What we’re really debating is [whether or not it’s] going to be [a] 25 or … 50 [basis point rate cut],” added Berro, who is an asset management portfolio manager for global fixed income.
The Fed will have two more important datasets to consider before meeting on Sept. 17-18 in Washington, D.C. One is a reading from the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, on Aug. 30, and the second is a jobs report from the Bureau of Labor Statistics on Sept. 6.
The jobs data will likely help the Fed decide whether its first cut will be small or large. That last jobs report offered new signs of a cooling labor market, which stoked fears that the Fed may have waited too long to start lowering interest rates after keeping them at a 23-year high for the last year.
In July, the unemployment rate rose to 4.3% — its highest level since October 2021. The US economy added 114,000 nonfarm payroll jobs in July, fewer than the 175,000 expected by economists. Some Fed watchers have argued the central bank should have decided at its July meeting to lower rates for the first time in four years to get ahead of a slowing US economy before it tips into a recession.
Those criticisms became louder last week amid the worst one-day rout for the stock market since 2022. Others have said the Fed is still where it needs to be. “The Fed may, in hindsight, say they were late, but I don’t think they’re very late,” Goldman Sachs (GS) vice chairman Rob Kaplan told Yahoo Finance earlier this week. “If they’re late, it’ll be by a meeting or two. It’ll turn out to be tactical.”
One Fed official, Atlanta Fed president Raphael Bostic, said Tuesday before the latest CPI report that he wants to see “a little more data” before cutting rates. He wants to make sure the Fed doesn’t cut rates too soon and risk a reacceleration of inflation while at the same time ensuring the job market doesn’t turn “freezing cold.”
“I am willing to wait, but it’s coming … It is coming,” Bostic said. The Fed “should cut rates,” Moody’s Analytics chief economist Mark Zandi told Yahoo Finance on Wednesday following the release of the CPI report.
“I think they should’ve been cutting rates months ago, but I think this is proof positive that they’ve gotten inflation back to their target.”
