How weak does August CPI need to be tonight to "add fuel to the fire" for the Fed to cut interest rates by 50 basis points?

According to the Wise Finance APP, on Wednesday, the market will welcome one of the most important data for future Fed interest rate policy: the U.S. August Consumer Price Index (CPI). Due to the impact of falling gasoline prices that month, the August CPI is expected to weaken again, which may further support the Fed's rate cut decision at the meeting on September 17th to 18th.

Federal Reserve policymakers have clearly stated that it is the appropriate time for a rate cut. However, the biggest debate on Wall Street currently is whether the Federal Open Market Committee (FOMC) will cut the borrowing cost by 25 basis points from the current target range of 5.25%-5.50% or make a significant 50 basis points cut. The current target range of 5.25%-5.50% is the highest level in over 20 years.

According to CME's Fed watch tool, federal funds futures traders currently believe that there is a slightly higher probability of a 25 basis points rate cut, with a 69.0% chance, compared to a 31.0% chance for a larger 50 basis points cut.

Considering the Fed's dual mandate of price stability and full employment, it is currently more evident that inflation is receding, while the labor market is gradually cooling. After keeping rates at a high point in 2023 for over a year, the Fed is preparing for a rate cut. Due to inflation approaching the 2% target, its relative importance has decreased, and the Fed has recently shifted its focus towards the labor market.

Economists on average expect the August CPI to increase by 0.2% month-on-month. Year-on-year growth is expected to be 2.6%, lower than the 2.9% increase in July. Excluding the volatile food and energy prices, the core CPI is also expected to rise by 0.2% in August, with a year-on-year growth of 3.2%, consistent with the previous month.

Greg McBride, Chief Financial Analyst at Bankrate, stated, "Any moderation in housing inflation, in addition to the decline in gasoline prices, will have a significant impact and should have occurred earlier. Housing costs accounted for about 90% of the July CPI increase and over 70% of the core CPI year-on-year increase."

Seeking Alpha analyst Damir Tokic, in the article "August CPI Preview: The Final Obstacle to Fed Rate Cuts," said, "Unless the core CPI significantly exceeds expectations, the Fed may cut rates by 25 basis points in September. However, the market is looking for a 50 basis points cut, which may increase if the core CPI increases by 0.1% less than expected." Mott Capital Management also agrees with Tokic's view.

Another Seeking Alpha contributor, Chris Lau, also agrees with Tokic's assessment and stated that unless the CPI is significantly below expectations, the market should not expect a strong response from the Fed and a 50 basis points rate cut.

In addition, wholesale price inflation is also on the rise this week. A day after the August CPI is announced, the U.S. Bureau of Labor Statistics is expected to release the U.S. August Producer Price Index (PPI) data on Thursday. Unlike the CPI, the month-on-month growth in the U.S. August Producer Price Index (PPI) is expected to accelerate from a 0.1% increase in July to a 0.2% increase Excluding food and energy, the core PPI is expected to rise by 0.2% month-on-month, unchanged from July.

Nevertheless, Eric Wallerstein, Chief Market Strategist at Yardeni Research, wrote in an article that he expects the decline in China's PPI to drag down U.S. import prices and PPI goods