People shop at a store in Brooklyn, New York City, on August 14, 2024.
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The Fed will take a final look at inflation data this week before confirming soon the size of its widely expected rate cuts.
On Wednesday, the U.S. Department of Labor’s Bureau of Labor Statistics will release its August consumer price index report. One day later, the Bureau of Labor Statistics released its August report on the Producer Price Index, which is used as a proxy for wholesale-level costs.
With the question of whether the Fed will cut interest rates at the end of its next policy meeting on September 18 almost settled, the only question is how much. Friday’s jobs report didn’t provide much clarity on the issue, so it will be left to CPI and PPI readings to clarify the issue.
“Inflation data has taken a back seat to labor market data in terms of impact on Fed policy,” Citigroup economist Veronica Clark said in a note. “But as markets — and possibly related Council officials themselves are divided over the appropriate size of a first rate cut on September 18, with August consumer price index (CPI) data likely to remain an important factor in the upcoming decision.”
Dow Jones’ consensus forecast is for CPI to rise 0.2%, both for all items and for core CPI, which excludes volatile food and energy items. On an annual basis, inflation rates are expected to be 2.6% and 3.2% respectively. Both the overall producer price index (PPI) and the core producer price index (PPI) are expected to rise 0.2%. Fed officials generally place more emphasis on core indicators as better indicators of long-term trends.
At least for CPI, the reading is not particularly close to the Fed’s long-term target of 2%. But there are some important considerations to remember.
First, although the Fed focuses on CPI, it is not the primary measure of inflation. That will be the Commerce Department’s Personal Consumption Expenditures Price Index, which recently put headline inflation at 2.5% in July.
Second, policymakers are paying almost as much attention to the direction of the move as to the absolute value, with the trend over the past few months towards a marked slowdown in inflation. Especially in terms of overall prices, the 12-month CPI in August is forecast to fall by 0.3 percentage points from July.
Finally, Fed officials’ focus has shifted from a laser view of curbing inflation to growing concerns about labor market conditions. Hiring activity has slowed sharply since April, with the average monthly increase in non-agricultural employment falling to 135,000 from 255,000 in the previous five months, and job openings also declining.
Start with a small step
As concerns about labor intensify, so do expectations that the Federal Reserve will begin cutting interest rates. The current benchmark federal funds rate is 5.25% to 5.50%.
“August’s CPI report should show more progress in bringing inflation back to the Fed’s 2.0% target,” wrote Dean Baker, co-founder of the Center for Economic and Policy Research. Progress.” “Barring some extraordinary surprises, there should be nothing in this report that would prevent the Fed from cutting interest rates, most likely significantly.”
However, the market seems to have accepted the news that the Fed will start slowly.
Futures market pricing on Tuesday showed a 71% chance that the rate-setting Federal Open Market Committee would initiate easing with a quarter-percentage point cut, while there was only a 29% chance of a larger half-percentage point cut. CME Group’s Fed Watch.
However, some economists think this may be a mistake.
Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, cited a general pullback in hiring and sharp declines in employment in previous months, arguing that “the summer slowdown is likely to be more severe in a few months.” Serious” and the decline in employment is likely to be even more severe. Recruitment is “still a long way off.”
“We were therefore disappointed, but not surprised, that FOMC members, who spoke after the jobs report and before the pre-meeting blackout, still preferred 25 basis points of easing this month,” Toms said in a note on Monday. “. “But by the November meeting, with two jobs reports in hand, the case for a quick rate cut will be overwhelming.”
In fact, although market pricing indicates a tepid start to September’s interest rate cut, it is expected to be half a percentage point in November and possibly another half percentage point in December.
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