Cooling inflation and labor market data increase chances of interest rate cut, boosting economic growth prospects
Fed Rate Cut Odds Soar as Inflation Cools 🥶
The latest Consumer Price Index (CPI) report has sent a strong signal to the Federal Reserve: it’s time to consider cutting interest rates. With core CPI rising 3.3% year-over-year in June, a tenth of a percent below expectations, the odds of a rate cut in September have surged to 83%. This bullish development has analysts and economists alike convinced that the Fed will take action to stimulate the economy.
A September Rate Cut Looks Increasingly Likely 👀
“The stars are aligning for a September rate cut,” said Peter Tchir, macro strategy head at Academy Securities. “The Fed is getting closer to feeling comfortable about easing, and this CPI report is a significant step in that direction.”
In fact, some experts believe that a rate cut could come as early as the Fed’s July 30-31 meeting if the labor market continues to soften. “If the jobs market cools at a faster clip, the Fed could very well lower rates sooner than September,” noted Quincy Krosby, chief global strategist for LPL Financial.
Inflation on a Downward Trajectory 📉
The core CPI’s month-over-month increase of 0.1% is particularly encouraging, as it suggests that inflation is firmly on a downward trajectory. “This report strengthens the case for a September rate cut,” said Paul Ashworth, chief economist for Capital Economics.
Richard de Chazal, macro analyst for William Blair, agrees that the trend is clear: “June marks the third consecutive month of more moderate inflation growth, confirming that inflation is firmly back on a downward trajectory.”
Labor Market Cooling 👀
While the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, still needs to be watched, the labor market is also showing signs of cooling. The unemployment rate has ticked up to 4.1%, and Federal Reserve Chair Jay Powell has made it clear that the central bank is shifting its focus to a more balanced approach, considering both inflation and employment.
Fed Chair Powell’s Comments 💬
“The most recent labor market data do send a pretty clear signal that labor market conditions have cooled considerably compared to where they were two years ago,” Powell said during his testimony before US lawmakers. “This is no longer an overheated economy.”
With the Fed’s dual mandate of stable prices and maximum employment in mind, Powell’s comments suggest that the central bank is getting closer to feeling comfortable about rate cuts. “More good data would strengthen our confidence that inflation is moving sustainably toward 2%,” he said.
A Rate Cut in September? 🤨
While Powell stopped short of committing to a September rate cut, the writing is on the wall. As the labor market continues to cool and inflation remains in check, the Fed will likely take action to support the economy. As de Chazal noted, “Today’s report, and the subtle shift to a more balanced focus on slowing employment growth by the Fed, helps firmly put a September rate cut in the sights.”
In conclusion, the latest CPI report has significantly increased the odds of a Fed rate cut in September. With inflation cooling and the labor market softening, the stars are aligning for a bullish move by the central bank. As the Fed continues to monitor the data, it’s clear that a rate cut is not only possible but increasingly likely.
