Data released by the US Bureau of Labor Statistics on Wednesday showed that CPI in July was 2.9% YoY, which fell below 3% for the first time since 2021. An influential financial journalist known as the 'New Fed Communication Agency', Nick Timiraos, wrote that the July CPI data has paved the way for the Fed to begin cutting interest rates at its September meeting and has to some extent reduced objections to the first rate cut. He expects that the focus of the Fed's September meeting will be on the scale of the interest rate cut, whether it will follow the traditional 25 basis point cut or a larger 50 basis point cut.

Timiraos said that the reason why the scale of the interest rate cut may become the focus of discussion is because the recent US labor market has shown potential signs of weakness, but Wednesday's release of inflation data did not resolve this dispute. He said that this debate could be decided by labor market reports, including weekly jobless claims and the non-farm payroll report for August to be released on September 6. Whether there will be a larger 50 basis point cut will depend on whether there are unfavorable conditions in the labor market.

The article stated that Tom Barkin, President of the Richmond Fed, said last week that Fed officials were trying to 'figure out whether the economy is slowly moving into a normalized state, allowing rates to be normalized in a stable and planned way and achieving a soft landing, or whether it still needs to be truly infused with energy?'

Despite the mild CPI report, the steady rise in housing costs in July may weaken the optimism about this report. However, Fed officials have already said that they are prepared to cut interest rates in September, partly because inflation data for May and June was much milder.

The PCE price index, a favorite inflation indicator of the Fed, is expected to be released later this month for July. In addition, there is the CPI report for August, which can be referenced by Fed officials before the meeting on September 17-18.

According to Timiraos, the interest rate cut is almost inevitable, and the focus of the meeting will then shift to whether the interest rate cut decision is unanimous and how much the decision-makers expect to cut interest rates. At the September meeting, Fed officials will submit new economic and interest rate forecasts, which will also show how many rate cuts they expect to make at the last two meetings in November and December this year. He believes that mild CPI data may make the basic situation of three interest rate cuts this year more likely.

He also said that on the eve of the Fed's July meeting, the July CPI report seemed to be the last obstacle before the September interest rate cut. However, unexpectedly weak labor market data since then has indicated that even if the CPI report performs strongly, the interest rate cut could still be a high probability event.

After the July meeting, Fed Chairman Powell said that Fed officials would not rely on a single data point, but would consider the 'integrity' of economic data when deciding whether to cut interest rates in September. Just two days after the meeting ended, the US Department of Labor reported that recruitment slowed in July and the unemployment rate rose to 4.3%.

Timiraos believes that as the risk of weak recruitment rises, even without convincing mild inflation data that Fed officials had hoped for when job growth was strong earlier, the reasons for the September interest rate cut become more sufficient.

Editor/Somer