"New Federal Reserve News Agency": The path to rate cuts in September has been paved, the focus is on the size of the rate cut

The data released by the US Bureau of Labor Statistics on Wednesday showed that the US CPI in July was 2.9% year-on-year, dropping below 3% for the first time since 2021. Renowned financial journalist Nick Timiraos, known as the "New Fed News Agency," wrote that the July CPI data has paved the way for the Fed to start cutting interest rates at the September meeting, reducing objections to the first rate cut to some extent. He expects that the focus of the Fed's September meeting will be on the size of the rate cut, whether it will be the traditional 25 basis points or a larger 50 basis points.

Timiraos stated that the reason why the size of the rate cut may become the focus of discussion is that the US labor market has recently shown potential signs of weakness, but the inflation data released on Wednesday did not resolve this debate. He mentioned that this debate may be determined by labor market reports, including weekly jobless claims and the August non-farm payroll report to be released on September 6. If a 50 basis point rate cut is to be implemented, it will depend on whether the labor market shows unfavorable conditions.

The article mentioned that Richmond Fed President Tom Barkin stated last week that Fed officials are trying to "figure out whether the economy is slowly entering a normalization phase, allowing for a stable and planned normalization of interest rates and achieving a soft landing, or if more effort is still needed."

Timiraos' article mentioned that despite the mild CPI report, the steady rise in housing costs in July may dampen optimism about this report. However, Fed officials have already indicated that they are prepared to start cutting rates in September, partly due to the much milder inflation data in May and June.

The Fed's favorite inflation gauge, the PCE price index for July, is expected to be released later this month. In addition, before the meeting on September 17-18, there is also the August CPI report for reference.

Timiraos stated that a rate cut is almost inevitable, and the focus of the meeting will shift to whether the rate cut decision will be unanimous, and how much of a rate cut policymakers are expected to make. At the September meeting, Fed officials will submit new economic and 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 the mild inflation data may make it more likely for the basic scenario of three rate cuts this year.

He also mentioned that just before the Fed's July meeting, the July CPI report seemed to be the last obstacle before the September rate cut. However, since then, unexpectedly weak labor market data has indicated that even if the CPI report remains strong, a rate cut is still a high probability event.

Following the July meeting, Fed Chairman Powell stated that Fed officials will not rely solely on a single data point, but will consider the overall economic data when deciding whether to cut rates in September. Just two days after the meeting ended, the US Department of Labor reported that hiring slowed in July, with the unemployment rate rising to 4.3%.

Timiraos believes that as a result, **with the increasing risk of weak hiring, even without the convincing mild inflation data that Fed officials had hoped for earlier when job growth was strong, the reasons for a rate cut in September have become more compelling **