50 basis points to cut only when there are beads of sweat – Commerzbank

After the last labor market report, the Fed is once again focusing more on the second mandate of the two that it intends to fulfill. After all, it has recently emphasized that the balance between the two mandates, full employment and inflation, is now more balanced. After months of focusing on inflation, the data series par excellence, the FOMC members are now focusing more on the labor market, Commerzbank’s FX Analyst Antje Praefcke notes.

Rapid cuts at every meeting until the end of the year

“However, the fact that price data continues to be a strong market mover was impressively demonstrated yesterday afternoon when the US inflation data for July came in slightly below market expectations. The market felt vindicated and reacted immediately and unequivocally: the dollar fell and interest rate expectations were maintained at 100 basis points until the end of the year.”

“These figures lay the foundation for the start of the Fed's rate-cutting cycle in September. Analysis shows that the monthly rate of change in the consumer price index excluding food and energy was below 0.2% for the third time in a row. A monthly increase in the consumer price index of 0.2% is roughly consistent with the Fed's target of an annual inflation rate of 2% based on its preferred price index, the PCE deflator.”

“The Fed will not be in crisis mode and just because inflation is moving permanently and definitively towards the target, pull down the key interest rate by 50 basis points in September. I rather believe in rapid cuts, possibly at every meeting until the end of the year. For this to happen, the August labor market report would have to disappoint massively and literally show a slump in employment. Then, could beads of sweat develop on FOMC members' foreheads.”