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The latest inflation figures from August have reinforced the rationale Federal Reserve officials used to justify a recent half-percentage-point interest rate cut, prompting traders to speculate that the U.S. central bank will continue to implement aggressive rate reductions as inflation pressures move closer to the 2% target.
According to data released by the Commerce Department, the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices, has been rising at an annual rate of less than 1.8% over the past four months. Fed Governor Chris Waller highlighted this trend last week, expressing his support for the rate cut while voicing concerns that price pressures may be diminishing too rapidly.
Waller had predicted a monthly core PCE increase of 0.14%, which would have contributed to declining three- and four-month inflation rates. However, the actual increase for August came in slightly lower at 0.13%.
Diverging Inflation Trends
Other aspects of the August PCE data provided additional support for various arguments made by Fed officials following their recent meeting. Notably, housing prices are rising at an annual rate of less than 5% for the first time since early 2022. Atlanta Fed President Raphael Bostic has identified the share of goods experiencing price increases of 5% or more as a key indicator in his inflation analysis, noting last week that housing was the last significant area of elevated price pressure.
“The breadth of price increases is narrowing to levels consistent with price stability,” Bostic remarked after the Fed’s September 17-18 meeting. In July, only 18% of items were increasing at 5% or more, the lowest proportion since 2020, aligning closely with the long-term average of 17%. August’s figures are not yet available.
Implications for Future Rate Cuts
Economists suggest that if the Fed intends to implement another 50 basis points cut in November, the latest inflation data will not impede such a decision. “The quicker inflation cools, the stronger the impetus for the Fed to act decisively,” noted Omair Sharif, president of Inflation Insights. The Fed’s next policy meeting is scheduled for November 6-7, with traders anticipating that the central bank’s benchmark overnight interest rate will drop by three-quarters of a percentage point by the end of the year.
Mixed Opinions on Rate Cuts
Despite the recent decision to lower the policy rate to a range of 4.75%-5.00%, not all Fed officials were in agreement. Fed Governor Michelle Bowman dissented, advocating for a smaller quarter-percentage-point cut. Economic projections suggest that some policymakers may be hesitant to initiate an easing cycle with a substantial move.
August’s inflation report may not alleviate Bowman’s concerns about the need for a large rate reduction, as core PCE inflation ticked up to 2.7% in August from 2.6% in July. “On a year-over-year basis, core inflation remains uncomfortably above our 2% target,” Bowman stated this week.
Labor Market Considerations
While some policymakers express concern that year-over-year inflation could significantly decline in early 2025 due to comparisons with a period of unexpectedly rapid inflation, there is a growing focus on the labor market. Fed Chair Jerome Powell has indicated increasing risks to employment.
The upcoming labor market reports, including the September jobs report due on October 4, may influence the Fed’s decision-making regarding the pace of rate cuts. “Many employment indicators suggest that the labor market remains solid,” Powell said at his September 18 press conference, highlighting that the current unemployment rate of 4.2% is below the historical average.
However, Powell cautioned that certain labor market indicators show less tightness compared to pre-pandemic levels. He noted that the unemployment rate has been rising, with expectations it will reach 4.4% by the end of 2024, a full percentage point higher than the lows recorded in 2023.
Moreover, Powell mentioned the crucial relationship between job openings and unemployment, suggesting that the labor market is approaching a point where further declines in job openings could directly lead to increased unemployment.
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