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Federal Reserve policymakers are expected to start bringing interest rates down next week for the first time in four years after a key inflation gauge confirmed the economy continued to cool in August. But the Fed is likely to proceed cautiously as prices for some essentials — including housing — still appear to be rising at a faster clip than it would like.
After falling for five consecutive months to 2.53 percent annual growth in August, the Consumer Price Index is back to levels not seen since February 2021. The cost of oil and other energy was down 4 percent from a year ago, while food prices were up by only 2.1 percent, the Bureau of Labor Statistics reported Wednesday.
But a surprisingly large increase in core CPI, which excludes volatile food and energy prices, means that Fed policymakers are likely to start out with a modest 25 basis-point rate cut when they meet next week. A basis point is one-hundredth of a percentage point.
A string of weak jobs reports had sparked speculation that the Fed might kick off its rate-cutting campaign with a 50 basis-point reduction in the federal funds rate, or half a percentage point. But after the release of the CPI report, futures markets tracked by the CME FedWatch tool put the odds of a 50 basis-point rate cut on Sept. 18 at only 15 percent, down from 44 percent last week.
Chen Zhao
“A touch-hotter-than-anticipated August CPI report nudges the Fed toward a 25 basis-point rate cut at its meeting next week,” Redfin economist Chen Zhao said in a blog post. “However, inflation remains cool enough that the Fed could still surprise with a 50 basis-point cut to get ahead of further weakness in the…