Falling inflation puts Fed under pressure to cut interest rates

Inflation fell below the 3 percent annual rate for the first time since March 2021, increasing expectations that the Federal Reserve will cut interest rates in September.

U.S. prices rose 2.9% year over year in July, according to the latest consumer price index data from the Bureau of Labor Statistics. Core inflation, which excludes volatile food and energy prices, rose 3.2% annually in July, the smallest increase since April 2021.

“Overall, this report suggests that the worst of inflation may be behind us, giving the Fed room to consider cutting interest rates at its next meeting,” said Andrew Latham, certified financial planner and senior editor of Supermoney.com.

If everything goes according to plan, the central bank's interest rate cut should ease the pressure on household budgets somewhat and thus stimulate borrowing and consumption.

Will the Fed cut interest rates in September?

Most experts now expect the Fed to cut interest rates at its next meeting on September 17 and 18.

Fighting inflation has been the Fed's main focus, keeping interest rates high to restrict business and consumer activity. But the recent rise in unemployment is putting pressure on the Fed to change course to avoid a recession.

“It's time for the Federal Reserve to declare its fight against inflation 'mission accomplished,' stop fighting the economy, and focus on the jobs part of its mandate,” Julia Pollak, chief economist at ZipRecruiter, told CNET by email.

After the Federal Open Market Committee's July meeting, which left the benchmark interest rate in a target range of 5.25 to 5.50 percent, Fed Chairman Jerome Powell said a “rate cut could be on the table at the September meeting” if data continues to show improving inflation and a slowdown in the economy. The Fed's next decision could be influenced by two upcoming economic reports: unemployment figures on September 6 and another inflation report on September 11.

Many economists are concerned that if the Fed continues to keep its foot on the brakes and does not cut interest rates soon, it will have a negative impact on the labor market. “Unemployment will continue to rise, and companies – unable to afford loans for new investments – will be forced to stagnate and miss out on exciting growth opportunities,” Pollak said.

Most forecasters call for a 25 basis point rate cut in September, but some argue that the Fed should cut even more, say 50 or 75 basis points, to avoid a cycle of job losses, Pollak said.

What do lower inflation and interest rates mean for your money?

Interest rate adjustments can affect many aspects of your finances. Higher interest rates for borrowers make it more expensive to take out a mortgage and pay off credit cards.

Read more: How the Federal Reserve will affect mortgage rates in 2024

Lower interest rates make loans more affordable. But lower interest rates also mean lower returns on your savings. Now may be your last chance to lock in the best rates on CDs, high-yield savings accounts and money market accounts.

Regardless of what happens on a macroeconomic level next month, try to follow practical financial advice from experts. Setting up an emergency fund and sticking to long-term investments can help you weather the ups and downs of the economy.

“While we should remain cautious and prepared, now is not the time to panic,” Latham said.

Even though prices aren't as high as they were a few years ago, it's still difficult to afford everyday necessities like gas and groceries, as well as housing. Check out these ways to save up for a little relief.