On Tuesday, the rate of producer price index (PPI) in July in the United States was lower than expected, further easing concerns about inflation among market participants and strengthening traders' expectations that the Federal Reserve will cut interest rates multiple times before mid-2025.

According to the Federal Reserve monitoring tool of CME Group, traders generally believe that the Federal Reserve may cut interest rates by a full 200 basis points before July next year. This will reduce the Federal Reserve's main interest rate target from the current 5.25%-5.5% to around 3.25%-3.5%.

Meanwhile, they expect the Federal Reserve to cut interest rates by 50 basis points with a 54.5% probability at the next meeting on September 18th, and to further loosen policy before the end of the year.

In other words, traders have returned to their earlier expectation of multiple interest rate cuts at the beginning of the year, but this time based on concerns about economic slowdown or recession, which seem to outweigh concerns about inflation.

The problem is that so many interest rate cuts will mean that decision makers believe they will not cause inflation again. Over the weekend, Federal Reserve Council Member Bowman expressed caution about interest rate cuts, noting that she still sees upward risk of inflation.

The Tuesday report showed that PPI in July rose slightly by 0.1% compared to the previous month, but soon after economists such as Stephen Stanley warned that the data included strange and unstable factors. Paul Ashworth said the report "is not as good as it looks." Lauren Henderson, an economist at Stifel, Nicolaus & Co., said the details of the report were "not balanced enough."

Although the PPI report contained some signs of anti-inflation trends, Henderson said she and her company are still waiting for more data.

Henderson said on the phone: "Unlike the market, our basic expectation is that the Federal Reserve will stand pat in September until we see the Consumer Price Index (CPI) data on Wednesday and Personal Consumption Expenditure (PCE) data at the end of the month."

"We are more inclined to Bowman's view that the risk is upward and that we do not expect to see the first interest rate cut in the fourth quarter."

Wednesday's CPI report for July is expected to show that the year-on-year inflation rate will remain at 3%, while the core inflation rate is slightly lower than 3.2%. After that, the annual Jackson Hole Symposium of the Federal Reserve will be held from next Thursday to next Saturday, which will give Powell an opportunity to express whether there will be any changes in his thoughts before more data appears. The preferred inflation indicator of the Federal Reserve, July PCE data, is scheduled to be released on August 30th, and the August CPI report will be released on September 11th, one week before the Federal Reserve's expected first interest rate cut.

"Given the first-quarter inflation data exceeding expectations for three consecutive months, we are still a little tired of the market's high expectations of interest rate cuts," Henderson said. "The Federal Reserve has no good record in achieving a soft landing, and only achieved it once in the mid-1990s. Based on past cycles, the Federal Reserve will find it difficult to achieve the subtle balance of lowering inflation and keeping the economy stable. However, this cycle is very different from past cycles." Stifel, Nicolaus & Co. has not ruled out the possibility that the Federal Reserve will win the anti-inflation battle while cutting interest rates.

Wednesday's CPI report and August inflation data to be released in September will determine many things, and traders are sure that the Federal Reserve will begin to relax policies next month. Their only question is whether the rate cut will be the usual 25 basis points or larger.

Derek Tang, an economist at Washington Monetary Policy Analysis Company, said the problem now is whether "you believe that inflation will come down in any case. If so, there is no cost to cutting interest rates to avoid the risk of recession, because even if inflation stagnates, the Federal Reserve can still slow down the pace of interest rate cuts. This is not so bad. The real problem is that the Federal Reserve's wrong interest rate cut leads to inflation rising again. That will be a problem because slowing down the rate cut is not enough to solve it."

He said that interest rate cuts seem to be the price the Federal Reserve officials "are willing to pay for now, if this means that there is a chance to save the economic expansion and prevent the economy from falling into recession." "Nevertheless, there may be more supply shocks, both domestic and foreign. This means that the prospects for inflation will be more turbulent, and Federal Reserve officials will need to ask themselves whether they really can achieve the 2% target or whether they should allow some changes around this level."

As demonstrated in the first half of this year, even without actual action by the Federal Reserve, expectations of interest rate cuts may have an impact: The rise in the stock market in May is seen as a contribution to the so-called wealth effect, making many Americans feel richer, which may make people more skeptical about how consumption demand can drop enough to reduce inflation.

Despite many good news in the fight against inflation, the Federal Reserve still cautiously said that it will not cut interest rates too quickly in the coming months, and said it needs more confidence in the data before taking action.

Glenmede, headquartered in Philadelphia, manages $45.5 billion in assets. Michael Reynolds, vice president responsible for investment strategy, said, "We believe the Federal Reserve is very concerned about the risk of interest rate cuts too quickly."

Reynolds said:" The Federal Reserve will wait for a reason until the September meeting. Before that, it will get two CPI inflation data. If signs of improving inflation are seen, decision makers will have room to start cutting interest rates before that."

He said, "We believe that the Fed's slow and systematic path of returning interest rates to neutral levels is a sustainable path. Our baseline is that the economy will not fall into a recession, but we must closely monitor labor market data as the situation could quickly change."

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