Federal Reserve officials gather for their policy meeting next week with clear signs that inflation has eased, but it is still unclear exactly what they will do about interest rates. The latest inflation data provided substantial evidence that price pressures have considerably eased since their sharp jump in 2021-2022. Measured as consumer prices, 12-month inflation stood at a level not seen since February 2021, while wholesale prices have eased to some extent. These are two indicators that may be pointing to a wriggle of sorts in the inflation dynamic. These can create an opening for the Federal Open Market Committee to do a rate cut as the committee’s deliberation ends today with a decision on the rates and also the first revision of quarterly forecasts of the economy. Claudia Sahm, the chief economist for New Century Advisors, said, “We’ve got two more months of good inflation data,” adding, “That’s what the Fed asked for.”
However, the size of that cut remains uncertain. Ahead of the week, markets have expected a cut of a quarter point, or 25 basis points. Through Friday’s close, expectations seem to shift fluidly between the possibilities of cuts of 25 and 50 basis points.
Sahm argues for an even deeper cut, 50 basis points, to address potential vulnerabilities in the labor market. “The fight against inflation has been won. They need to start getting out of the way,” she said, noting that the labor market “really started showing signs of softening” since last July.
Consumer inflation numbers also help out the doves, as the overall consumer price index rose only 0.2% in August, and so the yearly inflation rate remained at 2.5%. But core inflation measures 3.2% because food and energy are not taken into account. Much of this is due to shelter costs, particularly through the “owners equivalent rent” measure reported by the Bureau of Labor Statistics, which rose an astonishing 5.4% on an annualized basis and skews inflation measures given its weight in the broader calculation.
Consumer attitudes toward inflation may be stabilizing, though these price pressures linger. The University of Michigan’s gauge of inflation expectations fell in September to 2.7 percent for the next 12 months, its lowest reading since December 2020.
Fed Chair Jerome Powell sounded increasingly confident that inflation is entering the long-sought 2% zone. But concerning labor markets, which Powell last week said the Fed does not want to see further cooling in, concern lingers.
There remains much support for a modest quarter-point cut, though Fed actions will speak to how aggressively it will balance the control of inflation against labor market stability in the months ahead.
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