US Consumer Prices and Fed Rate Cut Expectations

Headline US consumer prices rose by 0.2% on a monthly basis in August, matching July’s rate. However, the core figure, which excludes food and fuel prices, accelerated slightly, hinting that the Federal Reserve may not pursue aggressive interest rate cuts during its upcoming policy meeting.

Monthly and Yearly Overview

• Monthly Headline CPI: Met economists’ expectations, annual figure slowed to 2.5% from 2.9% (July).
• Core CPI: Increased by 0.3% month-on-month, surpassing the estimated 0.2%, with a year-over-year rate of 3.2%, matching July’s pace.

Fed Expectations

With investors anticipating a rate cut from a 23-year high of 5.25% to 5.5% at the two-day meeting starting Sept. 17, uncertainty lingers over the degree of this potential cut, with analysts split between a 25-basis point reduction or a 50-basis point reduction.

Analysts at Vital Knowledge noted that expectations for a 50-basis point cut would likely be dialed back, predicting the initial market reaction could lead to declines in stocks and bonds.

Market Reactions

US stock futures fell following the report, while the 2-year Treasury yield slightly increased. According to the CME Group’s FedWatch Tool, the chances for a quarter-point cut climbed to 85%, while the possibility of a half-point decrease dropped to 15%.

Fed Focus on Labor Market

Fed Chair Jerome Powell emphasized the need to adjust monetary policy in light of downside risks to the jobs market. Other officials echoed his sentiments, stressing the importance of balancing inflation control with employment protection.

Recent employment data revealed the US added fewer jobs than expected in August, while the unemployment rate met forecasts at 4.2%—slightly down from 4.3% the previous month. Despite fewer hirings and low job openings, a decline in jobless claims offered some reassurance.

Bank of America analysts observed that labor market data will now more significantly influence the Fed’s cutting cycle than inflation metrics, emphasizing their dual mandate of maximum employment.