The U.S. August CPI is uneventful. Will the "three consecutive rate cuts" scenario for the Federal Reserve in 2024 be replayed?

According to the latest U.S. CPI inflation report for August, which was released by Zhitong Finance APP, the core inflation in the U.S. for August slightly increased as widely expected by the market after excluding the volatile food and energy categories. However, traders are still collectively betting that the Federal Reserve will announce its first interest rate cut of the year next week, with the vast majority expecting a 25 basis point cut. Following the release of unusually weak initial jobless claims data, some traders are wagering that the Federal Reserve is significantly "behind the curve," betting that it will cut rates by 50 basis points in September to initiate a rate-cutting cycle. After the CPI data, which was largely in line with expectations, market pricing showed that the probability of a 50 basis point rate cut by the Federal Reserve in September rose from less than 5% to around 10%.

In addition, traders are generally increasing their bets that a rate-cutting pace similar to that of 2024 will soon unfold—specifically, three consecutive rate cuts starting in September. The difference is that in September 2024, the Federal Reserve began its rate-cutting process with a 50 basis point cut, whereas most interest rate futures traders are still betting on a 25 basis point cut in September this year.

According to the latest data released by the U.S. Bureau of Labor Statistics on Thursday, the so-called core Consumer Price Index (core CPI) rose by 0.3% month-on-month in July, in line with market expectations. After including other components of price calculations, the overall CPI for August rose by 0.4% month-on-month, marking the largest month-on-month increase in overall CPI this year, slightly higher than the market's general expectation of 0.3%.

In terms of year-on-year CPI data, the core CPI in August increased by 3.1%, consistent with the previous value and general market expectations. The overall CPI also rose by 2.9% year-on-year, again in line with market expectations, but up from the previous value of 2.7%.

Statistical data shows that the prices of goods, excluding food and energy, have accelerated. This reflects an upward trend in the prices of new and used cars, clothing, and home appliances. Among the service items that the market is focused on, airfares have seen the largest increase in over three years. Several household consumption expenditures, including groceries, gasoline, electricity, and car repairs, have also significantly increased.

The report indicates that inflation continues to hover over the U.S. economy, especially as the global tariff policy initiated by U.S. President Donald Trump is significantly affecting the price increases of certain goods, while the ongoing rise in costs for some services may pose a more lasting upward pressure on overall U.S. inflation.

Nevertheless, following a series of weak employment data, the interest rate futures market generally expects that the Federal Reserve will announce its first rate cut of the year at next week's FOMC monetary policy meeting. However, if inflation remains strong in the following months, and if the effects of tariffs lead to continued unexpected expansions in CPI and PPI, this may complicate the expected path for further rate cuts by the Federal Reserve at subsequent FOMC meetings, with the market possibly anticipating that the Federal Reserve will "hold steady" in October and December—meaning that after one rate cut, it will pause further cuts U.S. stock index futures continue to rise, while Treasury prices have been climbing due to increasing expectations of interest rate cuts by the Federal Reserve. Ahead of the meeting on September 16-17 Eastern Time, Federal Reserve policymakers will also see the latest consumer confidence and retail sales data. The "CME FedWatch Tool" shows that interest rate futures traders generally expect the Federal Reserve to cut rates two more times this year, in October and December.

One of the key drivers of inflation in recent years has been housing costs, which is also the largest category in the CPI statistical report's service items. Data shows that housing prices rose 0.4% month-on-month, marking the largest increase of the year, reflecting rising rents and the largest increase in hotel accommodations since last November.

Another core service indicator closely monitored by Federal Reserve policymakers (excluding housing and energy costs) has declined, mainly driven by falling prices in healthcare, entertainment, and car rentals. Although Federal Reserve policymakers emphasize the importance of such indicators when assessing the overall inflation trajectory, they calculate this indicator based on another breakdown option of the PCE index, which may have slight discrepancies.

The Federal Reserve's preferred inflation measure—the core Personal Consumption Expenditures Price Index (core PCE)—does not weigh housing as heavily as the CPI. The PCE is derived from both the CPI and another release on producer prices, the latter showing varied performance across the categories included in the PCE.

The Labor Department's oversight agency, which supervises the Bureau of Labor Statistics (BLS), announced on Wednesday that it is launching a review to assess the challenges the agency faces in collecting and publishing key economic data. In recent months, the BLS has had to suspend CPI data collection in several major metropolitan areas in the U.S. and increasingly relies on a method to fill data gaps. This review will also examine the revisions made by the BLS to employment data, which have drawn broader criticism, particularly under pressure from the White House.

Federal Reserve officials are also closely monitoring the CPI and wage growth data, as this helps gauge consumer spending expectations—consumer spending-related items are the core engine of the U.S. economy. Another report released on Thursday, which combines inflation data with recent wage data, shows that real average hourly wages rose 0.7% year-on-year, the weakest in over a year, highlighting the ongoing cooling of the U.S. labor market. This is also the core logic behind the market's strong belief that the Federal Reserve will implement three consecutive rate cuts—namely, that the focus of Federal Reserve policymakers will shift from combating inflation to addressing the weak labor market.

Another report indicated that initial claims for unemployment benefits in the U.S. jumped to the highest level in nearly four years last week, reinforcing expectations of a weak and cooling labor market. However, weekly claims data may fluctuate around holidays, and the statistics for that week included Labor Day Senior analyst Ali Jaffery from CIBC Capital Markets pointed out that another indicator released this morning—the number of initial jobless claims—also supports the Federal Reserve's announcement of a rate cut in September. "Last week, the number of initial jobless claims unexpectedly jumped from 236,000 the previous week to 263,000. Of course, the inflation rate has not reached the 2% trend, but this is increasingly related to price increases caused by tariffs. Meanwhile, the non-farm employment market urgently needs the Federal Reserve to cut rates for support, and a weak job market means that price pressures on future demand will weaken."

The Federal Reserve's rate cut in September is almost certain; the market is divided on whether to cut by 25 basis points or 50 basis points.

Top traders on Wall Street have been continuously expecting that the U.S. Consumer Price Index (CPI) for August, to be released tonight, will show that inflation continues to rise since the non-farm data was released last Friday. Given the particularly dismal non-farm employment data for several consecutive months, and the significant downward revision of 900,000 in non-farm employment from March 2024 to March this year, few traders are betting that this CPI inflation data will change the fate of the Federal Reserve's rate cut announcement at the September FOMC.

Although the market has fully priced in the expectation that the Federal Reserve will cut rates at the meeting on September 16-17, investors are still changing their predictions regarding whether the Federal Reserve will cut rates by 25 basis points or a more aggressive 50 basis points in September, as well as the subsequent rate cut path.

In August, the U.S. non-farm employment increased by only 22,000, while the median economist estimate was 75,000. The unemployment rate in August rose to 4.3%, the highest since 2021, consistent with the median economist estimate. Additionally, the already weak non-farm employment numbers for June and July were revised down by another 21,000, with June's employment data revised to negative growth—marking the first monthly decline in employment numbers since 2020. This has led some interest rate futures traders to begin allowing for the possibility of a larger half-point rate cut, while now expecting more easing measures from the Federal Reserve by the end of 2025—betting on three consecutive rate cuts by the Federal Reserve before the end of the year.

Therefore, after the extremely weak non-farm data was released, some market views suggest that the Federal Reserve's FOMC monetary policy decisions should no longer be viewed from a preventive rate cut perspective, but rather as monetary policy being "slightly behind" the actual economic situation. Thus, driven by persistently weak employment and increasing political pressure, the extent of the Federal Reserve's rate cut in September and the degree of dovish signals may exceed general expectations.

Will the Federal Reserve follow a similar easing pace in 2024 and implement a "three consecutive rate cuts"?

On Thursday, a U.S. government report showed that initial jobless claims surged to a nearly four-year high, leading the interest rate futures market to continue increasing bets on Federal Reserve rate cuts, from expecting at least two cuts by the end of this year to betting on four consecutive cuts from September to January next year, to fully pricing in three rate cuts within the year, meaning the Federal Reserve will cut rates by 25 basis points at all remaining meetings this year.

Economists at Barclays have adjusted their forecasts, now expecting the Federal Reserve to implement three rate cuts of 25 basis points each this year, followed by two more cuts in 2026, consistent with the expectations of major Wall Street firms like Goldman Sachs regarding the Federal Reserve's rate cut path This reflects that the market has shifted the Federal Reserve's policy focus from combating inflation to addressing potential economic slowdown. However, there remains significant disagreement regarding the extent of interest rate cuts in September, with differing views on whether the Federal Reserve will cut rates three times or take a more conservative approach of 1-2 times for the remainder of the year.

Bank of America is relatively cautious about the Federal Reserve's interest rate path in 2025. Economists at the Wall Street financial giant Bank of America Corp. predict that the Federal Reserve will announce two rate cuts this year, expected in September and December, based on the unusually weak non-farm payroll data from August.

It is noteworthy that Bank of America has completely abandoned its previous hawkish monetary policy expectations, which investors viewed as an outlier on Wall Street. The bank had long maintained that the Federal Reserve would not take action on rate cuts until next year. However, with significant cracks appearing in the labor market and multiple indicators suggesting a sharp slowdown in the U.S. economy, Bank of America has entirely given up on the hawkish expectation of "no rate cuts for the year."

A recent research report from international financial giant Mizuho indicates that the institution expects the Federal Reserve to initiate a new round of rate cuts as early as the upcoming September monetary policy meeting, marking a shift in the Federal Reserve's policy focus from combating inflation to supporting growth. Mizuho believes that the Federal Reserve will begin cutting rates cautiously but decisively, and then "fully implement a dovish easing policy"—meaning Mizuho bets that the Federal Reserve will continue the trend of easing monetary policy in the remaining two monetary policy meetings of 2025 and will lower the federal funds rate to around 3%, which is the "neutral" rate level predicted by Mizuho, in March 2026. This implies a significant cooling from the current interest rate range of approximately 4.25%