The Federal Reserve now seriously considering its first rate cut.
Monthly inflation in the United States fell in June for the first time since the COVID-19 pandemic, data from the Bureau of Labor Statistics showed. Overall, the Consumer Price Index (CPI) dropped more than expected in the world’s largest economy, signaling a first major victory against inflation.
Annual inflation in June came in at 3% instead of the 3.1% expected and down from 3.3% in May. The CPI declined 0.1% month-on-month, something that hasn’t happened since May 2020.
Core inflation, a measure excluding volatile food and energy prices, fell to 3.3% in June from 3.4% in May. Reuters-polled economists were expecting flatlining core inflation at 3.4%, or a 0.2% increase month-on-month.
Food and shelter prices were the strongest drivers of inflation, rising 0.2% monthly. They were more than balanced by declining gasoline prices at -3.8%, while the price of used cars dropped by 1.5% monthly and 10.3% annually.
The inflation reading came amid a weakening US economy, with unemployment edging higher at 4.1% in June from 4% a month earlier. However, the US economy added 206,000 nonfarm payrolls compared to the 200,000 expected, meaning the labor market remains somewhat strong.
A case for interest rate cuts
The recent inflation reading finally makes a case for cutting interest rates in September. Most inflationary measures are finally coming down consistently, and the US economy is feeling the weight of interest rates at their 23-year high.
The US Federal Reserve brought interest rates to 5.25% in June 2023.
“A lot can happen between now and September 18,” Chris Larkin, managing director of trading and Investing at E-Trade from Morgan Stanley, said, “but unless most of the numbers pivot back into ‘hot’ territory, the Fed’s reasoning for not cutting rates may no longer be justified.”
The Fed held back on rate cuts for months. In early 2024, markets priced a rate cut in June with absolute certainty. However, as inflation hovered around 3% for most of H1, the Fed kept postponing a pivot.
The Federal Reserve’s inflation target is 2%. Although that measure may be still far away, the Fed can now steadily bring rates down.
A September cut would assist the Democratic Party’s election campaign. Under President Joe Biden, inflation dropped from 9% in June 2022 to 3%. Cutting interest rates two months before the election would mark a final and complete victory against inflation. Most electoral analysts agree the economy is the most important issue for the majority of US voters.
