Rate cut green light is on! Is the Fed still likely to cut rates by 50 basis points in September?

The mild inflation data released on Wednesday has almost eliminated one of the last obstacles the Federal Reserve needs to clear before cutting rates in September.

In July, the U.S. Consumer Price Index (CPI) rose by 2.9% year-on-year, lower than the 3% in June. Excluding the volatile costs of food and energy, the year-on-year growth rate of core CPI in July slowed to 3.2%, lower than the 3.3% in June, marking the smallest increase since April 2021.

Nathan Sheets, Chief Economist at Citigroup, said, "I think this report gives the green light to the Fed in September."

The new data once again confirms that inflation is actually cooling down after rising in the first quarter of this year, a development earlier that prompted the Fed to warn that rates could stay high for longer.

Fed Chairman Powell made it clear at the end of last month that as long as the data supports it, a rate cut in September is "on the table." He and other policymakers have expressed their desire to ensure that inflation actually "sustainably" falls to the 2% target.

"It's just a matter of seeing more good data," Powell said at a press conference on July 31. "We just want to see more and gain confidence."

Traders are currently betting 100% on a Fed rate cut in September. According to the CME Group's FedWatch tool, the probability of a 50 basis point or 25 basis point rate cut is about fifty-fifty.

Kelsey Berro, Portfolio Manager of Global Fixed Income Asset Management at J.P. Morgan, said earlier this week, "I think there is actually no debate about the Fed cutting rates in September, the real debate is whether to cut by 25 or 50 basis points."

Before the Fed's interest rate meeting on September 17-18, there are two more important data points to consider.

The first is the Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) data, and the second is the non-farm payroll report scheduled to be released by the U.S. Bureau of Labor Statistics on September 6. Employment data may help the Fed decide whether the first rate cut should be small or large.

The previous non-farm payroll report provided new signs of a cooling labor market, raising concerns that the Fed may have waited too long to start cutting rates after keeping rates at their highest level in 23 years last year.

In July, the unemployment rate rose to 4.3%, the highest level since October 2021. The U.S. economy added 114,000 non-farm jobs in July, lower than the 175,000 expected by economists.

Some Fed watchers believe that the Fed should have made its first rate cut in four years at the July meeting to take a step ahead of a slowdown in the U.S. economy before it falls into a recession.

Last week, amid the stock market's most severe single-day plunge since 2022, these criticisms grew louder. Others argue that the Fed is still in its rightful state Former Dallas Fed President and current Vice Chairman of Goldman Sachs, Kaplan, said earlier this week, "In hindsight, the Fed may say they cut rates too late, but I don't think they were too late. Even if their rate cut came too late, it would only be late by one or two FOMC meetings, and that would be a tactical move."

Atlanta Fed President Bostic stated before the latest CPI data was released that he wants to see "more data" before cutting rates, ensuring that the Fed does not cut rates too early and risk accelerating inflation again, while also ensuring that the job market does not turn "cold."

Chief Economist at Moody's Analytics, Mark Zandi, pointed out after the CPI data was released that the Fed "should cut rates." He said:

"I think they should have cut rates a few months ago, but I think this is positive evidence that they have brought inflation back to target."