The latest inflation reading of 2.9 percent - the lowest since March 2021 - has all but cemented the odds of the Fed starting to cut rates in September. According to the CME FedWatch Tool, which gauges the probability of changes to the Fed's policy rate based on 30-day fed funds futures pricing data, markets are currently pricing in a 100-percent probability of a first rate cut next month, with the only remaining question being whether Jerome Powell and his colleagues will start off with a modest 25 basis point cut or even bring the policy rate down 50 basis points in one fell swoop. The latter is currently given a 25-percent chance, as it seems more likely that the Fed will start off slow and gradually lower its policy rate over the coming months rather than be aggressive and risk sending the wrong signals. After all, a steeper cut at this point could be interpreted as a sign that the Fed is in fact more worried about the economy than it is letting on, potentially fueling the recession fears that briefly gripped Wall Street last week.
The Federal Open Market Committee has kept the Federal Funds Rate steady at 5.25 to 5.50 percent since July 2023, putting the breaks on what has been the most aggressive tightening cycle since the early 1980s. Due to stalling progress progress in bringing inflation back to its target level of two percent, hopes of rate cuts beginning earlier this year turned out to be premature. Recent labor market data as well as the latest inflation readings indicate that the wait may soon be over, though, especially as Jerome Powell recently said that the Fed wouldn't wait until inflation is back down to two percent. "If you wait until inflation gets all the way down to 2 percent, you’ve probably waited too long," he said. "Because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below two percent."
