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The latest batch of inflation data gave the central bank a brightly lit, fog-free runway for an ambitious soft landing.
Given enough time, the economic data that once constrained policymakers now privilege them. If central bankers were looking for “more good data” before hitting the trigger switch, they may have found it on Wednesday as the CPI’s reading broke below 3%, the lowest annual figure since spring 2021.
“We see the report’s signal as reinforcement for the central bank’s rate cut, and we expect the first cut to come in September,” Bank of America Global Research economists wrote in a note on Wednesday.
But even as the encouraging reading reinforced what appeared to be inevitable tapering, the central bank managed to soften expectations of how deep it would cut in its first outing. The debate over lowering interest rates has shifted from “if” to “how much?” As quickly evolved. and “How much?”
According to the CME FedWatch tool, Wednesday afternoon market bets cut the likelihood of a 50 basis point decline to 37%, down from 53% on Tuesday and a good tick lower than last week’s 69%.
But that change may have had more to do with last week’s market panic and wavering confidence in the central bank’s ability to reduce inflation than with the big sell-off. After all, the tremors of last Monday’s financial earthquake prompted some observers to call for an emergency rate cut outside the central bank’s scheduled policy meetings.
This is a testament to how volatile the market can be. Stock indexes have recouped roughly half of their losses since their mid-July peak. Last week the sky fell. This week, we’re starting to take a more relaxed look at Goldilocks inflation metrics.
While the market is certainly accepting the prospect of lower rates, as Chairman Jerome Powell likes to remind us, the Fed must consider other factors. Three important datasets will come as waypoints ahead of the central bank’s September policy meeting.
First, the core PCE price index, the central bank’s preferred measure of inflation, on August 30. Then comes the August jobs report on September 6, and finally, a last, pre-meeting snapshot of pricing pressures in the form of another CPI report. On September 11.
Even if none of the readings offer a surprising turnaround, the central bank’s renewed focus on either side of its mandate complicates the policy response.
The acceleration and stubborn stickiness of inflation led the central bank to continue a historic tightening campaign. But risks of a faltering labor market and recession will dictate how aggressively the central bank pulls out easing.
Officers now have more freedom to act. But that doesn’t mean they know what to do.
Hamza Shaban is a correspondent for Yahoo Finance, covering markets and economics. Follow Hamza on X @hshaban.
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