Fed Rate Cut Expectations Cool Down Again

　　On Wednesday (September 11), the U.S. Bureau of Labor Statistics released the latest CPI data.

Data Overview

　　In August, the U.S. CPI rose 2.5% year-on-year, in line with expectations but down from 2.9% previously, marking a fifth consecutive month of deceleration and the lowest level since February 2021. Month-on-month, it increased by 0.2%, matching expectations and the previous value.

　　Source: Wall Street Journal

　　The core CPI (excluding volatile food and energy costs) rose 3.2% year-on-year, meeting both expectations and the previous figure. This marks the fourth consecutive month of slowing growth. Month-on-month, it increased by 0.3%, slightly higher than the expected and previous 0.2%, representing the largest increase in four months.

　　Source: Wall Street Journal

　　Following the release, traders scaled back their bets on a significant rate cut by the Federal Reserve in September. Currently, CME FedWatch Tool indicates a less than 20% chance of a 50 basis point cut and an 83% chance of a 25 basis point cut.

　　The slowdown in overall inflation in August was primarily driven by a decline in commodity prices: commodity prices fell 1.9% year-on-year, the lowest level since 2004; service prices continued to rise year-on-year but at the slowest pace since 2022.

　　The rise in core inflation was mainly due to accelerated increases in housing and transportation costs. Housing costs increased 0.5% month-on-month, with the Owners Equivalent Rent (OER) rising 0.5%, the largest increase since January and the second consecutive month of rise, contrary to widespread expectations of a decline. The rent index increased by 0.4%, and lodging away from home rose by 1.8%, up from 0.2% in July. Despite a 3.9% month-on-month rise in airfare after five months of decline, airfare remains cheaper compared to the same period last year.

Rate Cut Expectations

　　Federal Reserve Chairman Jerome Powell indicated last month at the Jackson Hole global central banking conference that the time for policy adjustments has arrived. The current major question in the industry is how substantial the Feds first rate cut will be.

　　Citi economists commented, “Given the increasing downside risks to the labor market and economic activity, the weaker CPI data suggests that the threshold for a larger rate cut may be relatively low.”