Inflation dip puts pressure on Fed to cut rates

Inflation fell below 3% annualized for the first time since March 2021, reinforcing expectations that the Federal Reserve will cut rates in September.

According to the latest figures, US prices rose 2.9% year-on-year in July. Consumer Price Index data released by the Bureau of Labor Statistics. Core inflation, which excludes volatile food and energy prices, rose at an annualized rate of 3.2% in July, the smallest increase since April 2021.

“Overall, this report suggests that the worst of inflation may be behind us, giving the Fed room to consider cutting rates at their next meeting,” said Andrew Latham, a certified financial planner and editor-in-chief of Supergeld.com.

If all goes according to plan, the central bank’s rate cut should ease some of the pressure on household budgets, boosting lending and spending.

Will the Fed Cut Rates in September?

Most experts now expect the Fed to cut rates at its next meeting on September 17 and 18.

Fighting inflation is the primary focus of the Fed, which has kept interest rates high to curb business and consumer activity. But a recent rise in unemployment has put pressure on the Fed to reverse course and avoid a recession.

“It’s time for the Federal Reserve to declare ‘mission accomplished’ in its war on inflation, stop fighting the economy and focus on the jobs part of its mandate,” Julia Pollak, chief economist at ZipRecruiter, told CNET via email.

After the Federal Open Market Committee meeting in July, which kept the federal funds rate at a target range of 5.25% to 5.50%, Fed Chairman Jerome Powell said a “rate cut could be on the table at the September meeting” if data continues to show inflation improving and the economy slowing. The Fed’s next decision could be influenced by two upcoming economic reports: unemployment numbers on Sept. 6 and another inflation report on Sept. 11.

Many economists worry that if the Fed continues to slam on the brakes and doesn’t cut rates soon, it will have negative effects on the labor market. “Unemployment will continue to rise, and businesses — which can’t afford to borrow to fund new investments — will be forced to stagnate and miss out on exciting growth opportunities,” Pollak said.

Most forecasts call for a 25 basis point rate cut in September. But some argue the Fed should go for a deeper cut, such as a 50 or 75 basis point cut, to avoid a cycle of job losses, Pollak said.

What do lower inflation and interest rates mean for your money?

Interest rate adjustments can affect many aspects of your finances. Higher interest rates for borrowers make it more expensive to take out a mortgage and pay off credit cards.

Read more: How the Federal Reserve Will Affect Mortgage Rates in 2024

Lower interest rates make it more affordable to borrow. But lower rates also mean less income on your savings. This could be the last opportunity to lock in the best rates on CDs, high-yield savings accounts, and money market accounts.

Regardless of what happens on a macroeconomic level in the coming month, try to stick to practical financial advice from experts. Starting an emergency fund and sticking to long-term investments can help you weather the ups and downs of the economy.

“While we need to remain cautious and prepared, it is not yet time to panic,” Latham said.

Even though prices aren’t as high as they were a few years ago, it’s still tough to afford everyday necessities like gas and groceries, as well as housing. Check out these ways to save some money.