Well-known financial journalist Nick Timiraos, also known as the "New Fed Communications Agency", wrote that August's inflation data paved the way for the gradual reduction of interest rates by the Fed next week. However, the relatively strong housing inflation caused the core price increase in August to be slightly higher than expected, which may make it more difficult for Fed officials to push for a larger 50 basis point rate cut at next week's Fed meeting.
USA's CPI in August increased by 2.5% year-on-year, in line with expectations, a significant decrease from the previous value of 2.9%, marking the fifth consecutive month of slowing down and the lowest level since February 2021; however, the core CPI in August (excluding the volatile costs of food and energy) increased by 0.3% month-on-month, slightly higher than the expected and previous value of 0.2%, marking the largest increase in four months. Wall Street analysts generally believe that the CPI data for August has nailed the rate cut by the Fed this month, but the slightly higher-than-expected increase in core inflation is expected to prevent a significant 50 basis point rate cut in September.
Well-known financial journalist Nick Timiraos, also known as the 'New Fed Communications Agency,' wrote that the inflation data in August paved the way for the gradual reduction of interest rates by the Fed next week, but a significant 50 basis point rate cut is not expected.
The relatively strong housing inflation in August led to a slightly higher-than-expected increase in core prices, which may make it more difficult for Fed officials to push for a larger 50 basis point rate cut at the upcoming Fed meeting next week. However, some officials have not completely ruled out the possibility of a larger rate cut. Meanwhile, although the easing of inflation provides some relief for burdened families, the labor market is also cooling, with slowing recruitment and wage growth, and an increase in the average duration of unemployment, making job hunting more difficult.
Brian Jacobsen, Chief Economist at Annex Wealth Management, also believes that a 50 basis point rate cut is unlikely.
"Slightly higher core inflation readings mean a 50 basis point rate cut is unlikely. The Fed may start cutting rates just as they started raising them: first by 25 basis points, and then selectively increasing the size of the rate cut as needed. Many people are concerned that if the Fed cuts rates by more than 25 basis points it could be perceived poorly, but they seem to forget that each meeting is accompanied by a policy statement and press conference. What's important is not just the action, but the transmission of information."
Josh Jamner, investment strategy analyst at ClearBridge Investments, said that the August CPI data will disappoint the short-term bond market expecting over a 250 basis point rate cut by the end of 2025.
"Today's data is slightly unfavorable, but it will not prevent the Fed from normalizing monetary policy starting next week, but it may redefine the future interest rate path."
There are further signs indicating that inflation may be trickier than previously thought, which could lead to a slowdown in the rate cuts cycle and to a smaller magnitude.
Chris Zaccarelli, Chief Investment Officer of Independent Advisor Alliance, wrote in a report that the Federal Reserve has now got the 'green light' for a 25 basis point rate cut next week.
Some may be disappointed that the inflation data did not come in lower than expected, as this could give the Federal Reserve more room to cut rates by 50 basis points. However, most Fed officials have expressed their desire to start slowly rather than with a large rate cut right from the beginning.
Seema Shah of Principal Asset Management stated that this is not the CPI data the market was hoping for.
Due to core inflation being higher than expected, the path for a 50 basis point rate cut by the Fed becomes more complicated. While this data may not be a barrier to next week's policy actions, the hawks on the committee might seize today's CPI report as evidence that caution is needed with the last leg of inflation – a strong reason for them to opt for a 25 basis point cut.
Ben Vaske, Senior Investment Strategist at Orion, said:
"This morning's CPI data coming in below expectations reiterates the Fed's stance on the need for rate cuts. The Fed shifting its focus towards employment rather than inflation at this time seems reasonable as recent labor reports have been weaker than expected, accompanied by downward revisions to previous reports. We still fully anticipate a 25 basis point rate cut in a week, where the market will have to balance the benefits of lower rates against signals of economic weakness."
Chris Low of FHN Financial believes describing today's CPI as a 'bad report' is incorrect.
Some components did see significant increases, but the most concerning - owner's equivalent rent (OER) and airfare - came after several months of positive news. Meanwhile, inflation is gradually decreasing, as can be seen from the trend of year-on-year decline in CPI inflation.
Overall, I think it's well controlled. It appears we have not seen any deflation risks.