Rate Cut on the Horizon: Inflation Data Sets Stage for August Interest Rate Reduction.

New inflation data suggests an interest rate cut is possible in August.

Recent inflation data has sparked speculation that the Federal Reserve (Fed) could cut interest rates in August. Despite President Trump's push for immediate rate cuts and support from two of his appointees, Chris Waller and Michelle Bowman, the Fed is expected to hold rates steady at the July 30 meeting [1].

The June jobs report was firmer than expected, and inflation has been relatively stable, posting 0.1% and 0.2% month-on-month readings between February and May [1]. However, the Fed is cautious about the impact of tariffs on inflation, with the July, August, and September Consumer Price Index (CPI) reports potentially showing higher month-on-month readings of 0.4% or even 0.5% [1].

The Fed's stance is supported by the fact that nearly 90% of jobs added over the past two and a half years have been in sectors like government, leisure and hospitality, and private education and healthcare services, while other key sectors have added an average of only 23,200 jobs per month [1]. Additionally, energy costs are contained, and the weaker jobs market means wage growth is not strong enough to drive inflation this year [1].

While the Fed is unlikely to cut rates in July, the groundwork for future cuts is being laid. The market currently prices a 16 basis point (bp) cut in September, but the Fed may wait until December to make a 50bp cut if the evidence on weaker jobs and GDP growth becomes more apparent [1]. This would be similar to the Fed's actions in 2024, where it waited until it was comfortable to commit to a lower interest rate environment before making a series of cuts [1].

The dollar is expected to remain supported by the Fed's cautious stance on rates, with USD/JPY potentially trading up to 150 over the coming weeks, and EUR/USD correcting back to 1.15/16 if the Fed/resilient labor market story plays out [1]. Meanwhile, the undervalued commodity currencies could continue to outperform due to the threat of tariffs [1].

In conclusion, while the Fed is unlikely to cut rates in July, the recent inflation data suggests that an interest rate cut could be possible in August, with the market pricing a 16bp cut in September. However, the Fed may wait until December to make a more substantial 50bp cut if the economic data supports it.

References:
[1] https://think.ing.com/articles/federal-reserve-preview-fed-to-hold-the-line-but-cuts-are-coming/
[2] https://newsd.in/highest-fd-interest-rates-in-july-2025-top-6-banks/
[3] https://www.cbsnews.com/news/federal-reserve-powell-trump-fomc-interest-rate-meeting-july-30/