On Wednesday morning, investors will focus on the August Consumer Price Index (CPI), a key measure that could shape the Federal Reserve’s next steps on interest rates.
The data, expected at 8:30 a.m. ET, may show inflation easing to 2.5%, down from July’s 2.9% annual rate.
Monthly price increases are forecast to remain steady at 0.2%, mirroring July’s rise.
Core inflation, which excludes volatile food and gas prices, is projected to hold at 3.2% year-over-year—unchanged from July—while the monthly core increase is also expected to stay flat at 0.2%, according to Bloomberg.
While inflation has cooled, it still hovers above the Fed’s 2% target, keeping policymakers on edge.
Yet, with recent signs of a softening labor market, the odds of a rate cut by the Fed’s September 18 meeting are high.
The Federal Reserve Chair, Jerome Powell, recently hinted that changes to interest rate policy could be coming, stating, “The time has come for policy to adjust” during the Kansas City Fed’s annual economic symposium in Jackson Hole.
But just how much will the Fed cut? Wednesday’s CPI report could help clarify that.
Economists at Bank of America anticipate more positive news on inflation, which they believe strengthens the case for a September rate cut.
“We expect the August CPI report to continue the good news on inflation,” wrote Stephen Juneau and Jeseo Park.
However, they caution that shelter costs and core services like healthcare and insurance may keep core inflation elevated.
Goldman Sachs shares a similar outlook, predicting shelter inflation will moderate in August.
“We expect further disinflation in 2024,” their economists wrote, pointing to easing pressures in the auto, housing, and labor markets.
The 25 or 50 Basis Points Question
The debate now centers on whether the Fed will cut rates by 25 or 50 basis points.
Wells Fargo’s team, led by Jay Bryson, suggests that another mild CPI report could give the Fed confidence to opt for a 50-point cut.
However, if inflation surprises on the high side, a 25-point cut might be more likely.
As of Tuesday, traders were betting on a nearly certain rate cut by the September meeting, with odds split 70/30 in favor of a 50-basis point cut, down from 60/40 last week, according to the CME FedWatch Tool.
But inflation isn’t the only factor driving the Fed’s decision.
The U.S. economy added fewer jobs than expected in August, signaling potential weakness in the labor market.
“Beyond the first cut, activity and labor market data will be a more important determinant of the pace and depth of the cutting cycle than inflation,” noted Bank of America’s Juneau and Park, stressing the Fed’s dual mandate of price stability and maximum employment.
For business leaders and investors, the Fed’s upcoming decision is a pivotal moment, with every data point shifting expectations.
As the clock ticks toward September 18, all eyes remain on the numbers, but the real story might just be how the labor market plays its part.
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