The latest Consumer Price Index (CPI) report showed that US inflation dropped to 2.5% in August 2024. This is considered a vital step forward for the Federal Reserve, which is mulling its first interest rate cuts in over four weeks.
Inflation Drops to 2.5%
The decline in inflation to 2.5% in August comes as a surprise to many analysts and gives the Federal Reserve a basis to reassess its monetary policy plans. The lowered inflation rate contributes to the likely cut of 25 basis points in the upcoming FOMC meeting on September 17th, which stands at a 71% probability according to CME Group’s FedWatch tool.
Stock Market and Fed's Decision
The United States has been fighting persistent inflation for several years, especially after the onset of the pandemic. The Federal Reserve's continuous rate hike policy to tackle inflation has received mixed responses. On one hand, these hikes were essential for containing inflation; on the other, they raised concerns about a potential delay in economic recovery. August showed an unexpected drop in inflation from 2.6% in July to 2.5%, bringing the Fed closer to its 2% target. This occurs after a $2 trillion stock market crash in early August, heightening the pressure on the Fed to cut interest rates.
Future of Fed's Decision
The upcoming meeting of the Federal Reserve in September could be a pivotal moment for its policy. The US economy is in a phase of recovery after significant turmoil, and lowering interest rates could facilitate stabilization and further economic growth. The forthcoming rate cuts would mark a substantial shift from the current monetary policy course but could also be a necessary step towards a soft landing of the economy.
The drop in inflation to 2.5% in August 2024 is a significant event that may influence the Federal Reserve's future decision on interest rates. Markets and investors' attention will be focused on the upcoming Federal Reserve meeting in September, where further rate cuts are anticipated.
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