As time goes on, economic data that once shackled policymakers now gives them leeway. If central banks are looking for "more positive data" before they start stimulus measures, they may find it on Wednesday when the Consumer Price Index (CPI) reading fell below 3%, the lowest annual figure since spring 2021.
"We see signals from this report strengthening the Fed's tendency to taper, and we expect the first tapering to happen in September," Bank of America Global Research economists wrote in a note on Wednesday.
Still, while this encouraging reading strengthened the case for tapering that was seen as inevitable, it also managed to temper expectations about how far the Fed would cut in its first attempt. The debate over interest rate cuts is quickly turning from “if” to “how much?” and "how big?".
Market bets on Wednesday afternoon put the likelihood of a 50-basis-point decline at about 37%, down from 53% on Tuesday and significantly lower than last week's 69%, according to CME's FedWatch tool.
Still, the change may have more to do with last week's market panic and massive sell-off than faltering confidence in the Fed's ability to rein in inflation.
While markets accept the possibility of lower rates as a near certainty, the Fed will have other factors to consider, as Chairman Jerome Powell often reminds us. Three key data sets will be released as a guide before we get to the Fed's policy meeting in mid-September.
First is the core PCE price index, the Fed's preferred measure of inflation. Then the August jobs report on September 6th, and finally, the last glimpse of price pressures before the meeting in the form of another CPI report on September 11th.
Even if none of those readings offer surprises, the Fed's renewed attention to both sides will complicate the policy response.
Policymakers now have more freedom of action.
