Treasury Secretary Calls for 50 Basis Point Rate Cut Amid Mixed Inflation Data

The Secretary of the Treasury has urged the Federal Reserve to implement a 50 basis point interest rate cut in September, marking the beginning of a series of rate reductions. This call comes after July's inflation data showed no significant rebound, with the Consumer Price Index (CPI) rising 2.7% year-over-year, in line with expectations. However, the core CPI, which excludes volatile food and energy prices, increased to 3.1% year-over-year, and the "super core" CPI, which further excludes housing, rose 0.5% month-over-month, the second-highest level in nearly 18 months.

Despite the Secretary's plea, market expectations for a 50 basis point rate cut in September remain extremely low, with a probability of only 0.1% according to market tools. The more likely scenario, according to market participants, is a 25 basis point rate cut. This divergence in expectations highlights the uncertainty surrounding the Federal Reserve's next move and the potential impact on the broader economy.

Economists point to the upcoming August non-farm payroll data, scheduled for release on September 5, as a crucial factor in the Federal Reserve's decision-making process. A significant deterioration in the data, particularly a decrease in jobs and an increase in the unemployment rate, could potentially drive a more substantial rate cut. However, unless the data shows an "extremely bad" situation, the Federal Reserve is likely to opt for a 25 basis point rate cut.

The Federal Reserve's recent economic projections indicate that core PCE inflation is expected to reach 3.1% by the end of the year. With core CPI already at this level and the effects of tariffs continuing to permeate the economy, officials may be cautious about implementing a larger rate cut while employment growth slows. In July, the U.S. added only 7.3 million non-farm jobs, and the job growth figures for May and June were significantly revised downwards to 1.9 million and 1.4 million, respectively. However, the unemployment rate remained steady at 4.2%.

Recent statements from Federal Reserve officials suggest a mixed stance on monetary policy. While some members, such as Governors Bowman and Waller, lean towards a 25 basis point rate cut, the majority of the committee remains hawkish, given that inflation has been above the 2% target for 53 consecutive months. Richmond Fed President Barkin indicated that policy adjustments would be made based on further economic clarity but did not signal a clear shift towards a dovish stance.

Analysts note that even if July's inflation data provides some room for the Federal Reserve to cut rates, it does not guarantee another rate cut in October. Market participants assign a 69% probability to a second rate cut in October, but some analysts believe this expectation is overly optimistic. They predict that the Federal Reserve may implement only two rate cuts this year, with the second cut more likely to occur in December.