A recent Federal Open Market Committee (FOMC) meeting held by the US Federal Reserve indicated that interest rates would remain at their highest level in over two decades. However, policymakers signaled a potential shift towards lowering borrowing costs due to easing inflation and a cooling labor market.
The upcoming Consumer Price Index (CPI) release for August is anticipated to show further disinflation, potentially paving the way for a cut in interest rates. Market discussions are now focused on the magnitude of the expected rate cut rather than its likelihood.
Recent softness in job data and negative revisions to previous reports have raised concerns about unemployment, which is now garnering more attention from the FOMC than inflation risks.
The August CPI release is scheduled for September 11, with forecasts suggesting a potential 0.23% increase for August or a 0.26% rise in core inflation, excluding food and energy prices. This would translate to an annual inflation rate of 2.6% and core inflation at 3.2%.
Additionally, the Personal Consumption Expenditures Price Index for July is expected to show a similar trend of disinflation, with nowcasts projecting a 2.6% annual rate for PCE inflation up to July 2024.
The FOMC views cooling inflation positively as it aligns with the 2% annual inflation target. In contrast, concerns are growing over the job market, with unemployment rates showing an upward trend over the past year.
Despite the FOMC's acknowledgment of a strong but not overheated labor market, policymakers have noted increased downside risks to employment compared to diminished inflation risks.
The majority of FOMC participants believe that if economic data continues as expected, it would be appropriate to ease policy at the next meeting on September 18. Market indicators suggest a likely cut in short-term interest rates, with a potential range of 5% - 5.25%.
Overall, the FOMC's focus is shifting towards addressing labor market concerns while monitoring inflation data closely to determine the appropriate policy actions moving forward.
