Fed Rate Cut Expected Next Week
So, with headline CPI inflation rising and core inflation remaining elevated, both remain comfortably north of the Fed’s 2.0% inflation target. Despite this, it is unlikely to stop the central bank from cutting rates next week. Although some market commentators were discussing a potential 50-bp move, I believe this CPI report removes this firmly off the table.
Investors are still fully pricing in a 25-bp rate cut (-27 bps), with another 25-bp reduction likely in October and a further 25-bp reduction in December. This would lower the current target rate to 3.50% – 3.75%, from 4.25% – 4.50%, which would be rather aggressive and provide Stocks and Gold with an additional bid (both markets remain at all-time highs) while weighing further on the USD and US yields.
Why Cut Rates When Inflation Is Rising?
Why is the Fed lowering rates while inflation is increasing? It comes down to Fed Chairman Jerome Powell’s observation that inflation is likely to be temporary, or ‘transitory’, and the weakening job market.
On the jobs front, the labour market has not been a pretty picture by any stretch. You will recall that the BLS recently announced its preliminary numbers for the annual benchmark revision, revealing a downward adjustment of approximately 911,000 jobs from April 2024 to March 2025. While we will not know until February next year what the final revisions are, this reveals the most substantial revision on record and indicates that the labour market is potentially more precarious than initially thought.
Reinforcing the narrative of a cooling labour market, the US weekly unemployment claims number was released yesterday: 263,000 people in the US filed for jobless claims (for the week ending 6 September). This marked the highest weekly employment claims since late 2021 and represented a rise from 236,000 the previous week.