The Federal Reserve is increasingly expected to cut interest rates next month, as the latest data shows a moderate rise in U.S. consumer prices for July and the smallest annual increase in inflation since early 2021. This development allows the central bank to shift its focus more towards the labor market, which is showing signs of a slowdown.
The Labor Department's report on Wednesday revealed that the Consumer Price Index (CPI) increased by 0.2% in July, following a 0.1% decline in June, aligning with economists' expectations. A significant contributor to this rise was a 0.4% increase in shelter costs, which accounted for nearly 90% of the overall CPI increase. Food prices also saw a 0.2% rise, while gasoline prices remained unchanged after two months of decline. On a year-on-year basis, the CPI rose by 2.9% in July, marking the first time it has fallen below 3% since March 2021.
"The relay race to Fed cuts is on," said Lindsay Rosner, head of multi-sector fixed income at Goldman Sachs Asset Management. "The Fed is on track to cut some amount in September, and we've got two more legs of this race to go."
With inflation moderating from its peak of 9.1% in June 2022, there is growing anticipation that the Fed will adjust its monetary policy. The odds of a half-percentage-point rate cut at the Fed's September 17-18 policy meeting are currently around 59%, according to CME Group's FedWatch tool. However, economists caution that the labor market would need to weaken significantly for such a large cut to materialize. The recent rise in the unemployment rate to 4.3%, driven mainly by an increase in labor supply rather than layoffs, suggests that a smaller rate cut is more likely.
"The probability of the Fed cutting by a half percent is still elevated since investors are still somewhat skittish from recent events," said Jeffrey Roach, chief economist at LPL Financial. "Unless the global economy experiences another shock, the Fed will most likely cut rates by a quarter percent in September."
The Fed has kept its benchmark overnight interest rate in the range of 5.25%-5.50% for over a year, following significant rate hikes totaling 525 basis points in 2022 and 2023. As inflation continues to move towards the Fed's 2% target, the central bank is expected to proceed cautiously with any rate cuts, balancing the need to support the labor market with its commitment to controlling inflation.
(Source:www.nbcnews.com)
The Labor Department's report on Wednesday revealed that the Consumer Price Index (CPI) increased by 0.2% in July, following a 0.1% decline in June, aligning with economists' expectations. A significant contributor to this rise was a 0.4% increase in shelter costs, which accounted for nearly 90% of the overall CPI increase. Food prices also saw a 0.2% rise, while gasoline prices remained unchanged after two months of decline. On a year-on-year basis, the CPI rose by 2.9% in July, marking the first time it has fallen below 3% since March 2021.
"The relay race to Fed cuts is on," said Lindsay Rosner, head of multi-sector fixed income at Goldman Sachs Asset Management. "The Fed is on track to cut some amount in September, and we've got two more legs of this race to go."
With inflation moderating from its peak of 9.1% in June 2022, there is growing anticipation that the Fed will adjust its monetary policy. The odds of a half-percentage-point rate cut at the Fed's September 17-18 policy meeting are currently around 59%, according to CME Group's FedWatch tool. However, economists caution that the labor market would need to weaken significantly for such a large cut to materialize. The recent rise in the unemployment rate to 4.3%, driven mainly by an increase in labor supply rather than layoffs, suggests that a smaller rate cut is more likely.
"The probability of the Fed cutting by a half percent is still elevated since investors are still somewhat skittish from recent events," said Jeffrey Roach, chief economist at LPL Financial. "Unless the global economy experiences another shock, the Fed will most likely cut rates by a quarter percent in September."
The Fed has kept its benchmark overnight interest rate in the range of 5.25%-5.50% for over a year, following significant rate hikes totaling 525 basis points in 2022 and 2023. As inflation continues to move towards the Fed's 2% target, the central bank is expected to proceed cautiously with any rate cuts, balancing the need to support the labor market with its commitment to controlling inflation.
(Source:www.nbcnews.com)
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