Quick Bites | Bank on a Sept Fed Rate Cut

US inflation eased substantially in June, extending a recent slowdown in price increases that clears a path for the Federal Reserve to cut interest rates by September. The consumer price index fell in June, dropping the year-over-year inflation rate to 3%, the lowest since June 2023. 

Core prices, which exclude volatile food and energy items and are seen as a better gauge of underlying inflation, rose just 0.1% since May. That was the mildest increase since January 2021, when large parts of the economy were still closed down by the pandemic.

Altogether, the CPI report released on 11 July showed prices cooled broadly in the second quarter and were below expectations – reversing what happened in the first three months of the year, when inflation was surprisingly resilient. Housing inflation, which reflects the cost of renting and accounts for about one-third of the CPI, had kept overall prices high.

The report opens the door to a September interest rate cut. Fed Chair Jerome Powell had laid the groundwork for rate cuts by suggesting the labour market is slowing in a way that has diminished a major source of inflation and risks further weakness that wouldn’t be desirable.

Investors don’t expect the Fed to lower interest rates at its next meeting on 30-31 July, but at its September meeting, followed by a second cut in November. The futures markets put around 90% probability of a September rate cut.

We appear to be in the Goldilocks scenario where there are signs the economy has cooled – not enough to stir fears of a recession but sufficient to enable the Fed to justify cutting rates. The Fed is trying to thread the needle between cutting rates too soon and allowing inflation to persist or amplifying the risk of waiting too long and causing unnecessary damage to the job market. 

Source: Wall Street Journal