Fed Expected to Deliver Quarter-Percentage-Point Rate Cut Next Week, According to Reuters

By Ann Saphir

(U.S. central bankers are anticipated to initiate long-awaited interest rate reductions next week, likely opting for a quarter-percentage-point decrease. This step aims to minimize the risk of a recession, despite persistent underlying price pressures that prevent more aggressive measures.

Traders have now reduced the likelihood of a half-percentage-point rate cut at the upcoming policy meeting, estimating it at less than 20%. This estimate has fallen from more than 25% prior to the release of the latest data, which indicated that the consumer price index (CPI) rose 2.5% in August compared to the previous year, down from a 2.9% increase in July.

When excluding the often fluctuating categories of food and energy, prices rose 3.2%, maintaining the same pace as the previous month. Economists often focus on core inflation for insights into overall price trends. Notably, shelter costs, which had shown signs of moderation in recent months, accelerated on a year-over-year basis for the first time since March 2023.

"I don’t know if it’s a blip, but this report suggests core inflation remains uncertain," commented Peter Cardillo, chief market economist at Spartan Capital Securities. "It likely seals a quarter-percentage-point decrease from the Fed."

Since July of last year, Fed policymakers have maintained the U.S. central bank’s policy rate in the 5.25%-5.50% range to exert downward pressure on inflation and align with their 2% target. Most officials express a desire to reduce rates soon to avoid excessive cooling of the labor market.

Recent data indicated a slowdown in U.S. hiring over the past months; however, a drop in the unemployment rate to 4.2% in August provided reassurance that the job market does not require immediate strong support from the Federal Reserve.

The CPI report released recently, which is the last significant economic indicator before the Fed’s upcoming meeting, offers policymaker additional motivation to reduce rates, albeit cautiously.

"We are not observing signs of inflation accelerating again, but there is less evidence of ongoing disinflation in this data compared to the last three months," said Thomas Simons, a senior economist.

Traders involved in rate-futures contracts are currently projecting a year-end policy rate of 4.25%-4.50%, which indicates one half-percentage-point reduction might occur in one of the Fed’s final two meetings of the year.

The Fed will unveil policymakers’ individual forecasts for the interest rate trajectory at the conclusion of next week’s meeting.**