The Federal Reserve's interest rate cut next week is already "set in stone." Can tonight's CPI open the door to a 50 basis point cut?

In the past two weeks, a series of dovish economic data has paved the way for the Federal Reserve to cut interest rates, from Powell's dovish shift at Jackson Hole to last Friday's weak non-farm report, and then to this week's downward revision of 910,000 jobs and PPI data entering deflation. The Fed's interest rate cut next week is already "set in stone," and tonight's August CPI inflation report will determine whether the cut will be 25 or 50 basis points.

At 20:30 Beijing time on Thursday, the U.S. will release the August Consumer Price Index (CPI), with Wall Street generally expecting inflation in August to rebound due to tariffs. Specifically:

The overall CPI in the U.S. for August is expected to rebound to 0.3% month-on-month, up from 0.2% last month, and year-on-year will accelerate from 2.7% to 2.9%;

However, the core CPI growth rate is expected to remain unchanged, with the core CPI flat at 0.3% month-on-month and maintaining 3.1% year-on-year.

Different investment banks have varying analyses. Goldman Sachs expects the core CPI to rise by 0.36% in August, slightly above market consensus, reflecting upward pressure from tariffs, car prices, and airfare prices. JPMorgan also predicts a 0.4% increase in CPI, which would be the strongest monthly increase since December last year. Both investment banks point out that the impact of tariffs is beginning to show, and after corporate inventories are depleted, there will be more direct cost transmission pressure.

The Fed's interest rate cut next week is already "set in stone." According to the Fedwatch tool, the probability of a 25 basis point cut has risen to 92%, while the probability of a 50 basis point cut is 8%. However, if inflation unexpectedly softens, the probability of a 50 basis point cut will significantly increase. JPMorgan analyst Andrew Tyler stated that Powell's speech has ensured a 25 basis point cut in September, but unexpected dovish data could raise expectations for a 50 basis point cut.

In terms of market reaction, the options market shows that the implied volatility of the S&P 500 index on CPI day is only 58 basis points, the lowest level this year. Morgan Stanley analysis indicates that there is a potential increase of 0.06 standard deviations in CPI, which could push the dollar index up by 0.03% within an hour after the data is released.

Tariffs and Seasonal Factors May Drive Inflation Rebound

Due to rising gasoline costs and import tariffs leading to price increases for certain goods, the CPI in the U.S. for August may see a reboundEconomists expect that the CPI may be driven by both rising gasoline prices and tariffs pushing up commodity prices, with coffee prices recording the largest annual increase in nearly two and a half years, and beef prices soaring due to import tariffs and past drought impacts.

Goldman Sachs focuses on four key components in its CPI forecast, with used car prices expected to rise by 1.2%, reflecting an increase in auction prices; auto insurance costs expected to rise by 0.4%, continuing the trend of insurers passing costs onto consumers; and airfares expected to rise significantly by 3%, driven by seasonal distortions and increases in base ticket prices.

Among these, the impact of tariffs is particularly noteworthy. Goldman Sachs expects tariffs to contribute an upward pressure of 0.14 percentage points to core inflation, affecting multiple categories including furniture, auto parts, clothing, and entertainment products. The bank noted that August and September are expected to be peak periods for tariff transmission, as companies begin selling goods that bear the cost of tariffs after depleting their pre-tariff inventories.

Stephen Stanley, Chief Economist at Santander US Capital Markets, believes there is overwhelming evidence that more tariff-related inflation is on the way, although it may take several months to fully transmit. Citigroup economist Veronica Clark pointed out that autumn is typically a natural time for companies to raise prices, and data in the coming months will serve as an effective test for tariff-related price increases. If commodity prices remain moderate, it may indicate that weak consumer demand is limiting companies' ability to raise prices.

Samuel Tombs, Chief Economist at Pantheon Macroeconomics, stated that so far, the CPI's response to tariffs has been slow, partly because the goods sold by distributors were imported before the tariffs. However, the inventories of wholesalers and employees only amount to 1.3 months of tax revenue, indicating that companies are now selling goods that have incurred tariffs.

Rate Cut of 25 or 50 Basis Points?

The current market has fully priced in a 25 basis point rate cut, with focus shifting to the potential adjustment of the rate cut magnitude. JPMorgan's market intelligence department believes there is not enough threat to compel the Federal Reserve to remain on hold in September, but significant hawkish data may influence policy responses at the October and December meetings.

Goldman Sachs trader Paolo Schiavone emphasized in the inflation preview that the key is to distinguish noise from potential trends. In the bank's forecast of a 0.36% core CPI increase, 14 basis points come from tariff impacts. Excluding tariff factors, U.S. core inflation would be around a 2% annualized level, and the Federal Reserve should have already begun more aggressive rate cuts.

Barclays has adjusted its forecast, now expecting the Federal Reserve to implement three 25 basis point rate cuts this year, with two more cuts in 2026. This reflects a shift in market policy focus from combating inflation to addressing potential economic slowdown. The CPI swap rate currently anticipates an annual increase of 2.91% in August CPI and a month-on-month increase of 0.38%, both slightly above economists' consensusSchiavone pointed out that to trigger a 50 basis point rate cut, future non-farm payrolls need to average 10,000 jobs below trend level, which would put pressure on risk assets. If the labor market does not pose concerns and real-time data stabilizes, along with wage levels supporting employed individuals, market risks still lean towards the upside.

How will the market react?

JP Morgan has developed detailed market response plans for different CPI outcomes:

The probability of core CPI month-on-month being in the range of 0.30%-0.35% is 35%, corresponding to the S&P 500 index falling by 25 basis points to rising by 50 basis points.

If the data is better than expected, with a month-on-month increase of 0.25%-0.30%, stock indices are expected to rise by 1%-1.5%;

If it unexpectedly drops below 0.25%, it could trigger a rise of 1.25%-1.75%.

If core CPI month-on-month exceeds 0.4%, the S&P 500 index could fall by 1.5%-2%, but the bank believes the probability of such an extreme situation is only 5%.

Goldman Sachs' report indicates that option market pricing shows limited investor concern about violent market fluctuations triggered by inflation data, with an implied volatility of 58 basis points hitting a new low for the year.

Goldman Sachs makes specific predictions about the market impact on various asset classes. For government bonds, it suggests downplaying knee-jerk selling triggered by high inflation data, considering the artificial nature of tariff contributions; in the medium term, the yield curve should steepen in a bull market as rate cuts take effect; regarding the dollar, the inflation data has limited room to boost the dollar, and the Federal Reserve's tolerance for tariff-driven inflation has narrowed the divergence with other central banks.

Overall, risk assets face a supportive inflation backdrop—medium-term inflation risks are decreasing, coupled with the Federal Reserve's inclination towards easing policies, which is favorable for risk assets. The bank reminds that there are three more non-farm payroll data releases before the end of the year: October 3, November 7, and December 5, which will be key windows for observing the labor market and policy path