Economy

Fed Poised for September Rate Cut as Inflation Cools, According to Reuters

By Ann Saphir

Federal Reserve officials received new evidence on Friday indicating that inflation is continuing to moderate. This development sets the stage for a potential interest rate cut next month as the Fed’s focus shifts toward avoiding further declines in the labor market.

The Commerce Department reported that the personal consumption expenditures (PCE) price index increased by 2.5% year-over-year in July, consistent with June’s increase. The annualized rate of inflation, based on the Fed’s preferred measure over the most recent three-month period, remains significantly below the central bank’s target of 2%.

Last week, Fed Chair Jerome Powell stated that "the time has come" for rate cuts, following an aggressive series of interest rate hikes in 2022 and 2023, as the Fed targeted decades-high inflation. The policy rate has been maintained in the range of 5.25%-5.50% since July of last year.

Ben Ayers, a senior economist at Nationwide, noted that the latest price trends suggest that the Fed’s struggle with inflation is nearing its end, making a rate reduction at the policy meeting on September 17-18 likely. He added that further decreases may be considered if there is a significant downturn in the labor market.

In the wake of the report, which also indicated strong consumer spending, traders continued to predict an initial quarter-percentage-point rate cut, with expectations of a larger half-percentage-point cut at a future meeting. Financial markets are pricing in a total rate cut of one percentage point by the end of this year, though many analysts anticipate a smaller reduction, given the resilience of the economy. They emphasize that the state of the labor market will ultimately influence the Fed’s decision-making.

Economists at Evercore ISI expressed that the Fed has transitioned "from being an inflation-first Fed to a labor-first Fed."

The unemployment rate has risen by nearly one percentage point to 4.3% since the Fed ceased rate hikes a little over a year ago. While still low by historical standards, this increase is significant enough for Powell to indicate that the Fed is wary of any further labor market deterioration.

As the September meeting approaches, both investors and the Fed are focused on several key economic indicators, including the U.S. government’s employment report for August and the consumer price index for August, both of which will be released soon.

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