CPI Goes Negative! Powell Talks “Cool” Job Market. September Rate Cut?

Thursday’s CPI release: monthly CPI dropped 0.1%, as shelter costs (finally) slowed significantly (smallest rise since 2021). Core CPI rose 0.1% monthly and 3.3% annually. The lowest headline reading since April 2021 which marked the start of the inflation run up that led to rate hikes in 2022. The report was cheered by markets and Fed officials as it seems to confirm that the hot inflation data in Jan/Feb were year-end outliers. This definitely raised expectations for a September rate cut. The Fed will have 2 more months of CPI/PCE and jobs data to help confirm that. Chicago Fed President Goolsbee, “This is what the path to 2% looks like.”  Note that the annualized rate over the past 3 months is now 2.1%. Remove the infamous lagging shelter component and “we are there.” The futures market is indicating a 94% probability of a September cut and 80% of 2 cuts by December. Goolsbee also noted that as inflation falls, the “real” interest rate (Fed Funds rate minus PCE/CPI) is rising, further tightening economic conditions and he doesn’t believe that tightening is necessary at this stage. So, a rate cut will really be keeping real interest rates steady.  

Fed Chair Powell gave testimony to Congress where he noted that the jobs market has “cooled considerably” and is back to “pre-pandemic levels.” Translation “Mission Accomplished” (See my AI rendering of “cool Powell” below). He reminded lawmakers that, “We also have an employment mandate” and that cutting rates “too late or too little could unduly weaken employment.” He’s sounding the alarm on a possible “hard landing.” His tune has shifted from warning of cutting rates too early to cutting too late, very significant. The 10-year Treasury rallied down to 4.19%, down from 4.44% 11 days ago. Stay tuned…

By David R. Pascale, Jr., Senior Vice President at George Smith Partners.