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Key Inflation Reports to Shape Fed's Rate Cut Decision
This week, the Federal Reserve will take its final assessment of inflation data before its upcoming policy meeting, which is scheduled for next week. The insights gained will be crucial in deciding the extent of anticipated interest rate reductions.
Recent employment statistics released on Friday did not provide much clarity, leaving it up to the consumer price index (CPI) and producer price index (PPI) reports to shed light on the situation. The emphasis of Federal Reserve officials has transitioned from a concentrated focus on controlling inflation to growing concerns regarding the labor market's health.
Wednesday, the Labor Department Bureau of Statistics will publish its CPI report for August, followed by the PPI report the next day, which serves as an indicator for wholesale price movements. With expectations leaning towards a rate cut at the conclusion of the policy meeting on September 18, the primary question remains the magnitude of that cut. The jobs report from Friday did little to clarify this, making the upcoming CPI and PPI data crucial for decision-making.
Veronica Clark, an economist at Citigroup, noted in a recent memo, "flation data taken aseat to market data in terms of influence on Fed policy. However, with market participants—and likely Fed officials—divided on the appropriate size of the initial rate cut on September 18, the August CPI figures could play a significant role in the forthcoming decision."
The Dow Jones consensus anticipates a 0.2% rise in both the overall CPI and the core CPI, which excludes the more volatile food and energy prices. This is expected to yield annual rates of 2.2% and 3.2%, respectively. The PPI is also projected to see a 0.2% increase across both headline and core measures. Federal Reserve officials typically prioritize core figures as they are viewed as more reliable indicators of long-term trends.
While the CPI figures are not particularly near the Fed's 2% long-term target, it’s important to consider a few key points. Firstly, although the Fed monitors the CPI, it primarily relies on the personal consumption expenditures price index from the Commerce Department, which recently indicated a headline inflation rate of 2.5% for July. Secondly, policymakers are equally concerned with the trend of inflation as they are with its current value; recent months have shown a noticeable easing in inflation rates. Specifically, the forecast for the August CPI indicates a 0.3 percentage point decrease from July.
A Gradual Approach Ahead
With increasing attention on labor market dynamics, expectations for the Federal Reserve to initiate interest rate reductions have also intensified. The current benchmark federal funds rate is set between 5.25% and 5.50%.
Dean, co of the for Economic Policy Research, stated, "The August CPI report should reflect more progress in steering the inflation rate back to the Fed's 2.0% target. Unless there are unexpected developments, this report should not dissuade the Fed from proceeding with a rate cut, potentially a significant one."
However, market participants appear to be adjusting to the notion of a cautious start from the Fed. As of Tuesday, futures market pricing reflected a 71% likelihood that the Federal Open Market Committee would commence its easing strategy with a 25 basis point reduction, while there was only a 29% chance of more aggressive-point cut, according to CME Group's FedWatch tool.
Some economists, however, caution that this approach may not be prudent. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, pointed to the overall decline in hiring and significant downward revisions in previous job counts, suggesting that "the summer slowdown is likely to appear even more pronounced in a few months, and the downward trend in hiring has a long way to go."
Tombs expressed disappointment, though not surprise, that FOMC members who commented after the jobs report but before the pre-meeting blackout are still inclined towards a 25 basis point easing this month. "By the November meeting, with two additional employment reports available, the argument for swift rate cuts will be compelling," he added in a memo on Monday.
Original Article: https://www.cnbc.com/2024/09/10/weeks-two-key-inflation-reports-to-help-decide-size-of-feds-rate-cut.html
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