Cooling Prices Clears Way For More Fed Rates Cuts

The favorite inflation indicator of the Federal Reserve has released figures that boost the chances of an interest rate cut—on top of the dramatic half-point cut already recently announced.
With inflation having plummeted from its 2022 highs to just above the Federal Reserve’s 2 percent target, the central bank made a bold move last week, slashing its benchmark interest rate by a substantial half-point. This jumbo cut marked a dramatic policy shift following more than two years of elevated rates aimed at taming soaring prices.
In its statement last week the Federal Open Market Committee responsible for setting the rate pegged its cut to its dual mandate of stabilizing inflation and maximizing employment. Pointing to the former, officials have “gained greater confidence that inflation is moving sustainably toward 2 percent.”
Fed officials further signaled a dovish outlook, indicating plans to cut rates further by another half-point in both November and December. Looking ahead, the Fed anticipates continuing this easing cycle with four additional rate cuts projected for 2025 and two more in 2026. The aggressive rate reduction marks a significant pivot as the central bank seeks to balance economic growth with price stability, sending a clear message of confidence in the ongoing cooling of inflation pressures.
The strategy is in large part based on the personal consumption expenditures price index (PCE), released on Friday—over the better-known consumer price index. The PCE index measures changes in how consumers spend their money when inflation rises. This means experts can understand how people behave when they shop, for example managing their money by switching from pricier brands to cheaper ones.
Inflation continued its downward trend as prices rose just 0.1 percent from July to August, a slowdown from the previous month’s 0.2 percent increase, according to the Commerce Department. On an annual basis, inflation fell to 2.2 percent, down from 2.5 percent the month before, bringing it closer to the Federal Reserve’s 2 percent target.
This cooling of inflation appears to be reshaping the political landscape, potentially undercutting former President Donald Trump’s polling edge on economic issues. A recent survey by The Associated Press-NORC Center for Public Affairs Research revealed that voters are now nearly evenly divided on whether Trump or Vice President Kamala Harris would handle the economy better. This marks a notable shift from earlier polls when President Joe Biden was still in the race, with nearly six in 10 Americans expressing disapproval of his economic management.
As inflation eases and economic perceptions shift, both parties are recalibrating their economic messaging ahead of the 2024 election, with the economy set to remain a critical battleground.
When asked how current rate cuts would affect homeowners, Julius Wealth Advisors CEO and founder Jason Blumstein said “Mortgage rates won’t immediately be affected, especially given that most Americans have sub-4 percent rates. They may receive a drop in their credit card interest rate or variable rate loans. However, this reduction could also be offset by lower interest if they keep their money in cash or cash-like investment vehicles. Over time, if the Fed continues to cut, they can start to see a positive effect.”
This article includes reporting from The Associated Press