Inflation falls to three-year low, paving the way for Fed rate cut

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Diving certificate:

• TThe consumer price index rose just 2.9 percent last month from a year earlier, slowing to a three-year low, fueling expectations that the Federal Reserve will cut interest rates by at least a quarter of a percentage point next month.
• Compared to June, energy prices remained unchanged and clothing and used car prices fell by 0.4% and 2.3% respectively. The Labor Ministry said on August 14The declines offset a 0.4% increase in housing costs, which accounted for nearly 90% of the monthly increase in the consumer price index.
• “We see the signal from this report as strengthening the Fed's interest rate cut bias and continue to expect this to occur in September,” economists at Bank of America said in a report. They expect policymakers to cut the benchmark interest rate by a quarter of a percentage point in both September and December.

Diving insight:

TThe central bank will have to weigh falling inflation against signs of a slowing economy and a weakening labor market at its Sept. 17-18 meeting, Bank of America economists said. Congress has directed policymakers to achieve two goals: maximum employment and price stability.

“The Fed will likely have to balance both sides of its mandate, with the economy cooling down on the one hand, but inflation above [its 2%] Target on the other side,” said the bank’s economists.

Fed Chairman Jerome Powell and his colleagues have increasingly shifted their concerns to the labor market in recent weeks.

The unemployment rate rose to 4.3% last month from 4.1% in June. The number of employees only increased by 114,000. below expectations and the lowest monthly increase this year.

““Labor market loosening continues as the number of available workers has increased and the number of available jobs has declined – a sign that the labor market is returning to balance,” Fed Governor Michelle Bowman said in a speech on Saturday.

The latest data may overstate the slowdown in the labor market, Bowman said, warning against easing monetary policy too early based on unjustified optimism that the Fed will reduce inflation to the two percent target.

“We need to be patient and not undermine further progress in reducing inflation by overreacting to individual data,” she said.

Consumers, for their part, have become more confident that price pressures will ease. Their median inflation expectations for the next three years fell last month 0.6 percentage points to 2.3 percent, Reaching a record low in a data series The New York Fed said on Monday that it began in 2013.

Wall Street investors and economists believe the data suggests the Fed will cut borrowing costs next month for the first time in the current monetary policy cycle. The central bank has kept the benchmark interest rate in a range of 5.25% to 5.5% since July 2023.

“It would take a fair amount of evidence that the U.S. economy is warming back to call into question a rate cut in September,” Matt Colyar, an economist at Moody's Analytics, said in an email.