A mixed consumer price index (CPI) for August leaves the US Federal Reserve on track to cut interest rates at the next Fed meeting, with a quarter-percentage-point cut appearing more likely than a half-percentage-point reduction in borrowing costs.
The consumer price index for August rose 0.2% month-on-month. Office of Labor Statisticswhich was in line with economists’ estimates. However, the core CPI, which excludes volatile food and energy costs and is considered a better indicator of future prices, rose 0.3 percent. This exceeded expectations for a 0.2 percent increase and caused some unrest in the markets.
Market participants expect the Federal Open Market Committee (FOMC) to cut interest rates from a 23-year high at the next Fed meeting. The question is whether the central bank will cut the short-term benchmark rate by 25 basis points (a quarter of a percentage point) or 50 basis points (0.50%).
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“The Fed will most likely cut interest rates by 0.25% at its meeting next week,” writes David Royal, chief financial officer and investment officer at Thrive“A 0.50% cut would, in my view, have required much weaker inflation data today than expected. The slightly higher core inflation compared to last month probably makes a 0.50% cut unnecessary.”
On September 11, futures traders estimated that the Fed would cut interest rates by 25 basis points at the next Fed meeting with an 87 percent probability. A day ago, that figure was 66 percent. The probability of a 50 basis point cut fell to 13 percent from 34 percent the day before, according to the CME Group. FedWatch Tool.
With the August CPI report now on the record, we turned to economists, strategists and other experts for their thoughts on what the data means for markets, the macroeconomy and monetary policy going forward. Below is a selection of their comments, sometimes edited for brevity or clarity.
Expert opinion on the CPI report
(Image credit: Getty Images)
“The CPI inflation report was good, but not great. Consumer inflation remains a bit mixed, with relatively stable services and housing price inflation but persistent signs of weakness and price declines in consumer goods and energy prices. Overall, this report shows continued progress toward the Fed’s inflation goals, with encouraging signs that inflation may continue to ease due to falling energy prices and services and housing price inflation have room to ease. Nothing in this report would dissuade the Fed from a September cut, but market hopes for a larger half-percentage-point cut appear to be fading.” – Scott Anderson, Chief US Economist at BMO Capital Markets
“The economy is in the driver’s seat, not the Fed. That’s a good thing. Stabilizing prices, a solid market and strong corporate performance set the stage for the market to continue to rise while the Fed cuts rates. A 25 basis point cut in September is the most likely outcome.” – Scott Helfstein, Head of Investment Strategy at GlobalX
“Headline CPI rose just 2.5% year-on-year, the lowest in nearly three and a half years and welcome news in the fight against inflation, especially for households. Core inflation was a little higher, but that was mainly due to the known ripple effects of official housing inflation. This gives the Federal Reserve (Fed) an opportunity to begin changing policy and lowering interest rates at its meeting next week. The big question will be whether the Fed cuts rates by 25 or 50 basis points, and it will likely depend on President Powell whether they will take a big step to get ahead of the significantly weakening trends in the labor market.” – Sonu Varghese, Global Macro Strategist at Carson Group
“The consumer price index, which came in below expectations this morning, reinforced the Fed’s stance that the economy needs rate cuts. The Fed’s focus on employment rather than inflation now seems justified, as recent jobs reports have been weaker than expected and have been accompanied by downward revisions to earlier reports. We continue to expect a 25 basis point cut in a week, and markets will have to grapple with the benefits of lower rates versus signals of a weakening economy.” – Ben Vaske, chief investment strategist at Orion Portfolio Solutions
“Today’s CPI report is good enough for now. Inflation is moving in the right direction, allowing the Fed to cut 25 basis points this month, but housing costs remain a concern. On the other hand, we’ll likely get some relief next month from the recent drop in energy prices. The numbers aren’t overly dovish, but they confirm that the cooling process is still in effect. Attention may now shift from the Fed as a catalyst to earnings and the election cycle.” – David Russell, Global Head of Market Strategy at TradeStation
“The basic story of ongoing disinflation remains unchanged by this CPI report. The rise in the core index in August was driven by components that have much less weight in the core PCE deflator – the Fed’s preferred inflation indicator – or come from the PPI.” – Ian Shepherdson, Chairman and Chief Economist at Pantheon Macroeconomics
“The celebrated decline in housing inflation in June appears to be in question as the continued downward trend that many (including the Fed) had been calling for could be called into question. We all know that housing inflation must fall to get inflation back to target levels, so this is a big deal. This is a frustrating report for the FOMC as hopeful components that have shown disinflationary momentum are fading. The risk now is that inflation shoots lower as the Fed is forced to delay cuts until the data (which is delayed) changes and it is likely too late. In our view, this report all but guarantees a 25 basis point cut next week.” – John Luke Tyner, Portfolio Manager and Head of Fixed Income at Aptus Capital Advisors
“The general consensus on the Street is that the Fed is behind in starting its easing cycle. The Fed has been looking for more consistent economic numbers to justify a cut, and since its last meeting, which ended July 31, economic and labor market data, including manufacturing, have shown consistent weakness. However, consumer price data for August released today showed a 0.2% increase (higher than expected), suggesting that inflation is still a tough beast to tame. Every day that rates stay at this level increases the likelihood of a recession. What many have also missed is the actual time it takes for a rate cut to have an impact on the overall economy — economists say 8-10 months. Is the Fed behind? Markets don’t like that uncertainty, especially in an election year.” – Kathleen Grace, CEO of Fiduciary Family Office
“Although recent economic data suggests a deeper cut is already warranted, the Federal Reserve is likely to deliver only a 0.25% rate cut next week. The Fed is likely concerned, and rightly so, that a deeper cut would be seen as an admission that the Fed is playing from behind and that the economy is cooling faster than expected. Although hiring trends are likely to continue to slow, recent weekly employment data shows that the labor market is holding up, supporting a soft landing scenario. The Fed would like to get a few more data points before making a more drastic move.” – Ross Bramwell, Director at Homrich Berg
“Powell made it clear that progress on inflation so far is enough to justify starting to cut rates – and this report does not change that. Last week’s labor market data may have left the chances of a 25 basis point cut versus a 50 basis point cut uncertain, but today’s inflation data tips the balance in favor of 25 basis points.” – Elyse Ausenbaugh, Head of Investment Strategy at JP Morgan Asset Management
