Fed On Course for September Rate Cut

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This article was authored by:  Jennifer Schonberger

A fresh reading on the Federal Reserve’s inflation gauge inched up again, but it isn’t likely to knock the central bank off course to cut rates in September. But the size of that opening is going to depend on whether labor-market weakness continues to look like a bigger risk than rising inflation. The Personal Consumption Expenditures index on a “core” basis, which excludes volatile food and energy prices, rose 2.9% from a year earlier, up from 2.8% in the previous month and the highest since February. On a monthly basis, core prices increased 0.3% for the second month in a row. On a headline basis, prices rose 2.6% in July compared with a year ago, matching the increase in June. Month over month, prices rose 0.2% from June to July, down from 0.3% the previous month. While Fed officials are keenly watching how much tariffs push up inflation, the rise in “core” prices in July was due to a rise in services prices. That’s further evidence that tariffs are having minimal impact on goods prices. While inflation is not moving in the direction the Fed wants to see, Fed Chair Jerome Powell said in a speech in Jackson Hole, Wyo., last week that a reasonable base case is that inflation from tariffs will likely result in a one-time increase in prices — and that the balance of risks appears to be shifting. Powell indicated there is concern about the direction of the strength of the job market given the lower payroll report for July and large downward revisions to job growth in previous months. He also noted that there’s been a marked slowing in both the supply of and demand for workers, suggesting that downside risks to employment are rising. The next jobs report, due out on Sept. 5, for the month of August could be the determining factor for lowering rates at the September policy meeting. There are two important inflation reports before next month’s meeting — PPI and CPI on 9/10-9/11 — but as long as those reports don’t show a huge spike in inflation, the Fed will likely cut interest rates by 0.25% on September 17.