Cooler Inflation Reading Strengthens Case for Fed Rate Cut in September

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The latest evidence that inflation is on a cooling trajectory is bolstering the likelihood of a Federal Reserve interest rate cut this fall. The June Consumer Price Index (CPI) report, released Thursday, revealed a continued moderation in price growth, further reinforcing the case for a policy shift.

Financial markets are now pricing in a significant probability of a rate cut at the Fed’s September meeting, with traders assigning an 83% chance to such a move. This optimism stems from the realization that the Fed may have the necessary data to confidently ease monetary policy in the coming months, particularly if the labor market continues to cool as expected.

Some experts, including Quincy Krosby, chief global strategist for LPL Financial, are even suggesting that a July rate cut could be on the table if economic indicators signal a more pronounced softening in the job market. This scenario would mark a notable shift in Fed strategy, as the central bank has historically prioritized inflation control.

However, recent comments from Fed officials, including San Francisco Fed President Mary Daly, suggest that the central bank is increasingly prepared to address both price stability and maximum employment, indicating that a more balanced approach to policy may be emerging.

Core Inflation Cools Further, Bolstering Case for Fed Rate Cut in September

The latest round of inflation data paints a clearer picture of the Fed’s path towards interest rate reductions, with a September rate cut now appearing increasingly likely. The June Consumer Price Index (CPI) report revealed that core inflation, which excludes volatile food and energy prices, climbed 3.3% year-over-year, slightly below expectations and a moderation from the previous month’s reading.

This marked the third consecutive month of more moderate inflation growth, further confirming a downward trend. The month-over-month core CPI increase was also muted, rising just 0.1%, indicating a slower pace of price increases.

This positive development, coupled with the recent softening of the labor market, strengthens the case for a rate cut in September.

Experts Weigh in on September Rate Cut

Market analysts and economists are echoing the sentiment that the latest CPI numbers pave the way for a September rate cut. Peter Tchir, head of macro strategy at Academy Securities, believes the data firmly positions September as the target date for a rate reduction.

Paul Ashworth, chief economist at Capital Economics, agrees, stating that the “muted” month-over-month CPI increase strengthens the argument for a September rate cut. However, both emphasize that continued cooling of the labor market and the next reading of the Fed’s preferred inflation gauge, the “core” Personal Consumption Expenditures (PCE) index, will be critical factors in determining the timing and magnitude of any future rate cuts.

The Fed’s Focus Shifts to a Cooling Job Market

While inflation is a key concern for the Fed, recent comments from key policymakers suggest a shift in focus towards a cooling labor market. San Francisco Fed president Mary Daly acknowledged that the time for policy adjustments is “closer than six months ago.”

She highlighted the need to monitor both inflation and the labor market, recognizing that the risks to these factors are now in a more balanced state. Daly specifically noted that she is keeping a close eye on the job market, which she sees as “coming into better balance” and potentially leading to a rise in unemployment.

This sentiment aligns with Federal Reserve Chair Jerome Powell’s recent statement that the Fed is now focused on both sides of its dual mandate: price stability and maximum employment. Powell acknowledged a cooling labor market, emphasizing that the economy is no longer “overheated.”

This shift in focus could accelerate the Fed’s decision to begin cutting interest rates, with the latest CPI report providing further validation for a September rate cut.

The Path Ahead: Inflation and Employment in Focus

The Fed’s gaze is now firmly fixed on the cooling labor market, with Chairman Powell acknowledging its impact on the economy. San Francisco Fed President Mary Daly echoes this sentiment, suggesting that further labor market softening could even lead to a rise in unemployment.

This shift in focus underscores the Fed’s nuanced approach to navigating both inflation and employment. The next few months will be critical in monitoring both inflation and employment data, offering crucial insights into the trajectory of the Fed’s future policy decisions.

The upcoming readings of the core PCE index will be particularly important in assessing progress toward the 2% inflation target. Meanwhile, the labor market’s trajectory, including its impact on unemployment levels, will be carefully analyzed to gauge the economy’s overall health and the Fed’s potential for easing rates.

This delicate balancing act, focusing on both inflation and employment, will guide the Fed’s path toward a more stable and sustainable economic future.

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