US central bankers will likely start long-awaited interest-rate cuts next week with a quarter-of-a-percentage-point reduction, as stubbornly intact underlying price pressures put them off more aggressive action.
Traders now see just a 15% chance of a half-point rate cut at the Fed’s Sept. 17-18 policy-setting meeting, down from about 29% before the report that showed the consumer price index rose 2.5% in August from a year earlier, down from July’s 2.9% increase.
Excluding volatile food and energy, prices rose 3.2%. Shelter costs, where gains had been moderating in recent months, accelerated year-over-year for the first time since March 2023. Economists look at so-called core inflation to get a sense of the trajectory of prices.
“I don’t know if it’s a blip, but this report shows core inflation is still a question mark,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “It probably seals a quarter percentage point rate cut from the Fed.”
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Fed policymakers have kept the policy rate in the 5.25%-5.50% range since July of last year to keep downward pressure on inflation and get it on track to their 2% target. Nearly all of them say they want to dial that back soon to keep from slowing the labor market too much.
Traders of rate-futures contracts are now pricing a year-end policy rate of 4.25%-4.50%, a path that would include one half-point rate cut at one of the Fed’s final two meetings of the year. The Fed will release policymakers’ individual expectations for the path of rates at the end of next week’s meeting.
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