On the 11th, US Inflation Data Released... 'Dove' Powell Faces Hawkish Debate Over Rate Cut Size

August CPI Growth Expected to Slow to 2.6%
September FOMC Rate Cut Seen as Certain
Debate Anticipated Over Current Labor Market Assessment and Rate Cut Magnitude

This week, major inflation indicators in the United States will be released one after another. This is the last major indicator to come out before the Federal Reserve (Fed) enters a 'blackout' period starting this week, during which officials refrain from public comments ahead of the Fed's rate cut scheduled for the 18th. As inflation has already entered a stabilization trend, there are expectations that dovish (favoring monetary easing) and hawkish (favoring monetary tightening) factions within the Fed will engage in heated debates over the scale of the rate cut based on their assessments of the current labor market situation.

According to the U.S. Department of Labor on the 7th (local time), the Consumer Price Index (CPI) for August will be released on the 11th.

Last month’s CPI is expected to rise 2.6% compared to a year ago, slowing down from the previous month’s increase of 2.9%. After the July CPI inflation rate entered the 2% range for the first time in 3 years and 4 months since March 2021 (2.6%), inflation is expected to continue its downward trend. The Producer Price Index (PPI), a wholesale price index, will be released on the 12th, one day after the CPI announcement. August’s PPI is forecasted to rise 0.2% from the previous month, slightly exceeding July’s increase of 0.1%.

If the CPI does not spike significantly beyond expectations, a rate cut at the Federal Open Market Committee (FOMC) meeting on the 17th-18th is almost certain. This is because inflation is steadily declining toward the Fed’s 2% target as previously indicated.

The key issue is the size of the rate cut, which depends on the Fed officials’ assessment of the current labor market. Whether they view employment as gradually easing or worry about a rapid cooling will influence their judgment on the scale of the cut.

The August employment report released by the U.S. Department of Labor on the 6th signals that intense debate will occur among Fed officials. Although signs of labor market cooling have been detected, there is no confirmation of a sharp downturn. According to the report, nonfarm payrolls increased by 142,000 last month. This was below the forecast of 164,000 but better than the revised July figure of 89,000, indicating an improved employment situation.

Wall Street expects a fierce debate between Fed Chair Jerome Powell, who has left open the possibility of a big cut (0.5 percentage points) at the September FOMC meeting, and other officials who prefer a gradual monetary policy transition. Among the 19 FOMC members, 12 have voting rights on monetary policy decisions, and both Chair Powell and other members each have one vote.

Diane Swonk, Chief Economist at KPMG, predicted, "This report will spark a heated debate between Powell, who has left the door open for a large cut, and other officials who remain lukewarm even about a 0.25 percentage point cut." Tim Dewey, U.S. Chief Economist at SGH Macro Advisors, said, "Chair Powell is trying to steer the Fed in a dovish direction. If the economy unexpectedly slows, interest rates are too high to adapt to the shock, and easing will not be possible."

Investors remain skeptical about the possibility of a big cut by the Fed in September. The interest rate futures market currently reflects a 70% chance that the Fed will cut rates by 0.25 percentage points in September. The probability of a big cut is only 30%. However, the market reflects over a 91% chance of a 1 percentage point rate cut by the end of the year, suggesting rate cuts at the September, November, and December meetings, with at least one big cut.

This content was produced with the assistance of AI translation services.