Americans seeking relief from high borrowing rates might not have to wait much longer.
US consumer prices fell in June for the first time since the early months of the pandemic. Fresh data Thursday revealed that consumer prices dropped 0.1% from May. On an annual basis, inflation eased to 3% last month from 3.3% in May.
The welcome slowdown in inflation has led investors to move up their bets for when the Federal Reserve could begin cutting interest rates. Wall Street's expectations for a September rate cut rose to roughly 93% on Thursday from 73% the day before, according to the CME FedWatch Tool.
"A September rate cut should be a done deal at this point," wrote Ron Temple, chief market strategist at Lazard, in a Thursday note.
BNP Paribas economists on Thursday updated its base case to reflect a rate cut in September, citing the mix of June inflation and jobs data. They expect two quarter-point cuts in 2024.
The Fed has a dual mandate: Keep prices stable and unemployment levels low. The central bank began hiking interest rates in 2022 to tame wayward inflation and has held them steady at the current 23-year high since last July.
Thursday's data, coupled with a cooling but resilient labor market, is an encouraging sign that the Fed will be able to fulfill its dual mandate and begin easing sky-high rates in September. The US economy added 206,000 jobs in June, lower than a downwardly revised tally of 215,000 jobs in May, and the unemployment rate topped 4% for the first time since November 2021. New applications for unemployment benefits have also ticked higher in recent weeks.
Fed Chair Jerome Powell didn't give hints about when the central bank could start cutting rates during his congressional testimony earlier this week. But he acknowledged that inflation has moderated and that the labor market is "strong, but not overheated" — a departure from even just a few months ago, when inflation showed signs of reaccelerating and the jobs market remained red-hot.
Still, the Fed will have to parse more data before its September meeting, which could alter its trajectory. Some economists worry that if the Fed doesn't cut rates by then, cracks could begin to deepen in the labor market. Some investors are concerned that the economy could weaken dangerously even before then.
A September rate cut "may not be the magic elixir some investors are seeking," wrote Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, in a Monday note.
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