The Federal Reserve will almost certainly initiate a cut in key interest rates at their September meeting.
Inflation in the United States went down as expected in July, a Labor Department report showed on Wednesday. Both headline and core inflations are heading to 2%, the official target for price increases by the US Federal Reserve.
The Consumer Price Index (CPI), the general gauge to measure inflation, saw a 2.9% increase year-on-year, down from 3% in June. That represented a 0.2% monthly increase, up from a 0.1% decline in June, the first inflationary decrease since 2021.
Excluding volatile food and energy prices, core inflation came down to 3.2% annually in July. In June, US core inflation measured 3.3% year-on-year.
The largest price driver was shelter, amounting to 90% of the inflationary rise. Shelter prices jumped 0.4% in July, while food climbed 0.2%. Some items measured a larger-than-usual increase like eggs at 5.5%.
The Federal Reserve looks at core inflation to measure the actual effects of its monetary policy on the economy. With a stable path to the 2% target, there are seemingly no obstacles to a rate cut at the September 17-18 meeting.
“Today’s CPI print removes any lingering inflation obstacles that may have been preventing the Fed from starting the rate-cutting cycle in September,” said Seema Shah, chief global strategist at Principal Asset Management. “Yet, the number also suggests limited urgency for a 50 basis point cut.”
What a rate cut could mean for the economy
The Federal Reserve delayed a rate cut as long as possible, as testified by markets’ impatience for a reverse in monetary policy. Earlier this month, Wall Street indexes collapsed on their worst day since COVID, with many fearing the beginning of a recession.
But while stocks rebounded almost immediately, it signaled market investors will not wait much longer for a fed cut.
A rate cut in September would be a political assist for the Democratic campaign ahead of the November US elections. The danger to the Republican ticket was noticed by Donald Trump, who threatened the Fed to postpone the monetary decision until after the elections.
Trump also said he will exert more control on the Federal Reserve if reelected.
In any case, the US economy appears ripe for a rate cut in September. Unemployment is slowly edging up, showing signs of weakness in the overall economy. June unemployment reached 4.3%, far above the record lows of last year.
GDP growth is slowing down too, though not enough to cause recession panic among observers. The Atlanta Federal Reserve estimates a 2% GDP growth in the current quarter, down from 2.8% in Q2.
