The present moderate inflation reading is a bonus that has given the Federal Reserve the push it needs to think of rate cuts in September. This might be a change of position on the part of the Fed – a move that would be quite noticeable, considering that inflationary trends have started pointing to the downside.
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Cooling Inflation Precludes The Setting of Lower Rates
Two days ago the consumer price index CPI registered a 2. annualized growth rate of 9% in July, down from 3% in June. Hence, the so-called “core” inflation rate where the food and energy groups are excluded was at a 3. 2% increase in comparison to the same period of the previous year, although in June it was 3%. 3%. This is the slowest that it has risen since April of this current year and points out that inflation has started easing downwards after a sharp increase in the earlier months of the year.
Nathan Sheets, Citigroup’s Global Chief Economist said, this latest inflation could help the Fed to begin rate cuts in September. ‘This I think is a green light for the Federal Reserve in September’, Sheets said in a Yahoo Finance interview.
The purchaser and the borrower benefit from fixed-rate loans while the lender, for instance, the Federal Reserve, gets strategic timing.
This softer inflation data is slightly relieving after the first quarter of 2024 experienced renewed inflationary pressure which was persistent in the past that forced the Federal Reserve to keep a strict measure on interest rates. Back in July this year, the Federal Reserve chair Jerome Powell suggested that further rate cuts are in the offering, depending on the performance of the economy. Given that inflation is now in a downturn, it would appear that the prospects for a rate cut are in the process of coming into view.
Later during a press conference held on 31st July, Powell tried to cement the Fed’s stance He pointed out that even though a rate cut is ‘in play’ for September, it is conditional on ‘steady signals’ showing that inflation is ‘firmly anchored’ towards the Fed’s 2% target. ‘It’s just a question of seeing more good data’, Powell said, focusing on the need for more upbeat readings for inflation.
Reflected in both the market expectations and Actions of the FED
It has even had the effect of provoking anticipations of a September rate cut which the existing financial markets have already started to factor in. In specific, for the December contract, there is an expectation of a 100% rate cut according to the CME FedWatch Tool; the debate is on the depth of the cut: 25 or 50 basis points.
Kelsey Berro, a portfolio manager for global fixed income at JPMorgan Chase, said more in an interview: “I don’t think anybody questions that the Fed is cutting in September,” Berro said in an interview. “The actual question we’re debating is whether he’ll cut by 25 basis points or 50 basis points. ”
More Economic Indicators of Interest to Be Released Soon
Before the Fed’s meeting on September 17-18, two important data releases may factor into their decision: The first is the core Personal Consumption Expenditures (PCE) index which is the favorite inflation indicator of the Fed being published on August 30. The second is the Bureau of Labor Statistics job numbers which are due on September 6. The third is the Gross Domestic Product—Second Estimate for the second quarter due on September 27. These reports will offer other things to know on the health of the U. S economy which could prompt the Fed to change its decision on the dimension of the rate cut.
In particular, the focus is increasing on the labor market. The unemployment rate in the United States was again up in July, to 4. 3%, the highest since October last year, as the United States economy created non-farm payrolls only at 114,000-low, missing the economists’ forecast of 175,000. This cooling labor market may put pressure on the Fed to sharpen its moves to avoid a further deterioration of economic activity.
Different Voices on the Fed’s Timing
While there are economists who opine the Fed should have started to cut rates by now, there are other economists who think that the timing of the Fed is fine. In light of the above data, specifically, the ‘core’ inflation kept on declining, confirming the market’s expectation, Mark Zandi, Chief Economist at Moody’s Analytics called for an early rate cut. “They should have been cutting rates months ago but I believe this shows that they have inflation back to its target,” said Zandi.
But some can hardly wait to start raising rates and tightening credit conditions further. Raphael Bostic of the Atlanta Federal Reserve also gave a slightly different signal in his more reluctant call for a little more data. ’ Bostic urged that regulators must be on the lookout to prevent their rate cuts from fueling inflation or freezing the job market too much. ‘I am willing to wait they have already set a ball rolling it is coming,’ said Bostic.
Conclusion: A Turning Point for the U. S. Monetary Policy
Currently, the market looks for the US economy from which the Federal Reserve will draw its benchmarks as it heads to the September meeting. With inflation having eased and the labor market indicators suggesting it is stretched, the Fed has a difficult decision regarding its monetary policy. Whether the rate cut will be 25 or 50 basis points remains to be seen, but one thing is clear: This is so given the recent release of the relatively low inflation figure which has created a window through which the Fed may act as a sign that a new era in American economic management has dawned.
We will continue to monitor these changes and their potential effects on your banking – including bank accounts and CDs, loans, and credit cards – as the Federal Reserve moves next.
