In the last major release of economic data before the Federal Open Market Committee meets next week, a critical metric showed inflation dropping, continuing to clear the way for the Federal Reserve to cut its policy rate.
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The consumer price index went up by 2.5% in August from a year ago, the smallest year-over-year increase since February 2021, the Labor Department said Wednesday. The mark was down from a 2.9% increase in July.
Housing costs made up about 70% of the increase, although other indicators show rents have leveled out or even fallen nationally.
“The heat in today’s report is not one that will give the Fed pause,” former Fed economist Claudia Sahm told The Washington Post. “It’s more like, ‘You’ve got to be kidding me.'”
After this latest data drop, commercial real estate players and others are confident the first rate cut since 2020 is likely at the FOMC meeting on Sept. 18. Fed Chair Jerome Powell also gave a strong signal that the central bank will make a September rate cut in a speech at Jackson Hole at the end of August.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Other key economic indicators also point to the likelihood of a rate cut at the next meeting. Inflation readings and unemployment metrics are going in opposite directions as the Federal Reserve attempts to balance its dual mandate of stable prices and maximum employment.
The Fed's preferred inflation indicator, the personal consumption expenditures index, rose 2.6% year-over-year in July — still above the Fed's 2% target, but much lower than a 2022 peak of 7.1%. A weak jobs report last week strengthened the case.
Markets are now zeroed in on how aggressively the Fed will slash rates. CME's FedWatch tool estimates there is an 85% chance of a 25-basis-point cut and a 15% chance of a 50-bps cut.
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