Market observers are raising bets on the Federal Reserve implementing an interest rate cut at its next policy meeting. This comes after the release of the Consumer Price Index (CPI) for July. CPI rose by 2.9% over the previous year, down from June’s 3% increase. Core CPI, which excludes volatile food and gas costs, rose by 3.2% over 2023, lower than the 3.3% rise in June.
In addition to being the smallest rise since April 2021, this CPI reading sees inflation approaching the 2% mark, which is the Fed’s target rate. “I don’t think there’s really any debate that the Fed is cutting in September,” Kelsey Berro from JPMorgan Chase observed, with Citigroup’s global chief economist Nathan Sheets supporting this stance. Fed President Jerome Powell also acknowledged that a rate cut in September is “on the table” depending on what the data suggests.
The CME FedWatch Tool indicated that traders believe that there is a 100% chance that a rate cut in September will be implemented to some extent. The odds of a 50 basis point cut as well as a 25 basis point cut are both 50/50. More clarity on the Fed’s trajectory is expected upon the release of the central bank’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, due on August 30.