On Wednesday, investors will be focusing on the release of August’s Consumer Price Index (CPI), which is expected to show a 2.5% annual increase in headline inflation, a decrease from July’s 2.9%. Core inflation, which excludes food and gas prices, is expected to remain at 3.2% over the previous year. Although inflation is moderating, it has remained above the Federal Reserve’s 2% target. Recent economic data has pointed towards an upcoming rate cut by the Fed’s next policy meeting on September 18.
Federal Reserve Chair Jerome Powell stated at a recent symposium that the time has come for policy adjustment, hinting at a rate cut. The decision to cut rates will depend on how much policy adjustment is necessary, which will be clarified by Wednesday’s inflation update. Bank of America economists predict that the August CPI report will strengthen the case for a September rate cut, as core inflation remains elevated due to higher costs for shelter and core services like insurance and medical care.
Goldman Sachs anticipates a moderation in shelter inflation in August, with an expectation of further disinflation in 2024. The debate between a 25 or 50 basis point rate cut has intensified as inflation continues to moderate. Wells Fargo’s economics team believes that another benign CPI report could lead to a 50 basis point rate cut, while hotter than expected inflation data might result in a 25 basis point reduction on September 18.
As of Tuesday, markets were pricing in a nearly 100% chance of a rate cut by the end of the Fed’s September meeting, with a split in odds between a 50 basis point cut and a 25 basis point cut. However, the decision to cut rates will not solely depend on inflation, as the US economy added fewer jobs than expected in August. Bank of America’s economists believe that activity and labor market data will be more crucial in determining the pace and depth of the cutting cycle, emphasizing the Fed’s mandate of maximum employment.
Overall, the upcoming release of the August CPI report will be closely watched by investors as it could provide further clarity on the Federal Reserve’s decision to potentially cut interest rates in September. Inflation has remained above the Fed’s target, but recent economic data has indicated a weakening labor market, prompting expectations of a rate cut by the end of next month’s policy meeting. The debate between a 25 or 50 basis point rate cut hinges on inflation data and other economic indicators.
