The latest inflation report puts the Fed on course to cut the key interest rate by a quarter of a percentage point. Wall Street is not happy.

Based on new consumer price data, the US Federal Reserve is expected to continue its quarter-percentage-point interest rate cut next Wednesday. However, some people on Wall Street who had hoped for a half-percentage-point cut were disappointed.

The core consumer price index, excluding volatile food and energy prices – a measure the Fed prefers to focus on – rose 3.2 percent, in line with expectations and at the same level as July. A key reason for this was the housing market. The index for housing rose 0.5 percent in August and was the main reason for the high inflation last month.

On an overall basis, the consumer price index (CPI) rose 2.5% year-on-year in August, a slowdown from the 2.9% annual price increase in July and the lowest annual rate since the beginning of 2021.

Following the report, share prices fell sharply, but recovered slightly in the morning.

“Given sluggish inflation in the services sector, the Fed will likely cut rates by 25 basis points at the upcoming meeting and reserve the possibility of more aggressive action later this year if labor market conditions continue to deteriorate,” said Jeffrey Roach, chief economist at LPL Financial.

Inflation has been falling slowly since the second quarter. After fears that inflation might stall in the first quarter of this year, a slow downward trend has been observed. Inflation is now at 3.2 percent in August and July, compared to 3.3 percent in June, 3.4 percent in May and 3.6 percent in April.

The latest inflation data makes a 50 basis point interest rate cut unnecessary.

“Today's inflation data cemented a 0.25 basis point cut next week. 0.50 basis points is no longer possible,” said Gina Bolvin, president of Bolvin Wealth Management Group. “The labor market will continue to have an impact.”

Following the release of the consumer price index report, investor bets on a 25 basis point rate cut rose to 85%, according to the CME Fed Watch Tool.

Last week, both New York Fed President John Williams and Fed Governor Chris Waller said now was the time to cut interest rates.

“I believe it is time to lower the target range for the federal funds rate at our upcoming meeting,” Waller said last week in a speech at the University of Notre Dame titled “The Time Has Come.”

His comment is reminiscent of Fed Chairman Jay Powell's remarks in Jackson Hole in late August, when he said “the time has come” for the central bank to begin cutting interest rates.

The central bank, which meets on September 17 and 18, is currently focusing its attention on the labor market, as it is weakened and central bankers who had been worried about inflation – the other half of the Fed's dual mandate – are now more confident that inflation will cool down sustainably and return to the two percent target.

The story continues

Powell said in Jackson Hole that the Fed's focus was shifting more to the labor market. He said he was confident that inflation was on a sustainable path back toward 2% and said: “We will do everything in our power to support a strong labor market while we continue to make progress toward price stability.”

Powell noted that the Fed “does not seek or welcome a further slowdown in labor market conditions” and that the current level of the Fed's benchmark interest rate gives the Fed “ample room” to lower interest rates in response to any weakening in labor market conditions.

Most analysts believe the latest jobs report for August was not weak enough to justify a 50 basis point rate cut. However, downward revisions to job creation in already weak July and June were poor, and if labor market conditions continue to deteriorate, the Fed could consider even deeper cuts.

With inflation slowly falling – and the labor market slowing but showing no signs of recession – the Fed is likely to set a measured course of 25 basis points of interest rate cuts for the remaining monetary policy meetings this year.

Jennifer Schonberger is a veteran financial journalist who covers markets, economics, and investing. At Yahoo Finance, she covers the Federal Reserve, cryptocurrencies, and the intersection of business and politics. Follow her on X @Jenniferisms.

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