Markets shrugged off a hotter CPI as jobless claims surged, keeping a Fed rate cut on track
Consumer prices in the US climbed at a faster pace than expected in August, but market participants and analysts remained convinced that the Federal Reserve would proceed with a rate cut at its upcoming meeting, citing fresh signs of labor market weakness.
The consumer price index (CPI) rose 0.4% in August on a seasonally adjusted basis, twice the increase seen in July. That pushed the annual inflation rate to 2.9%, up from 2.7% in July and marking the highest reading since January.
The core CPI, which strips out volatile food and energy costs, increased 0.3% for the month and 3.1% over the year, both in line with economist forecasts and still above the Fed’s 2% target.
Shelter costs, which account for about a third of the CPI, were the biggest driver, rising 0.4% in August. Food prices jumped 0.5%, while energy costs advanced 0.7% as gasoline prices surged 1.9%.
Despite the higher inflation reading, most in the market did not expect it to stop the Fed from cutting rates next week. In fact, a sharp rise in jobless claims, which rose to a seasonally adjusted 263,000 for the week ending September 6, suggested the job market could be weaker than previously thought. Initial filings for unemployment insurance have now reached their highest point since October 2021. This could make employers cut back on hiring.
This uptick in unemployment filings has only strengthened the case for a rate cut, as the Fed weighs the risks of slowing economic growth against persistent, but manageable, inflation.
Market pricing reflected near-unanimous expectations that the Fed would lower its benchmark interest rate, currently set between 4.25% and 4.5%, at its two-day policy meeting concluding September 17. Some Fed decision-makers even moved to price in a slight chance of a half-point cut, rather than the usual quarter-point move, given the labor market’s apparent softening and subdued inflation readings.
For First American senior economist Sam Williamson, there could be a "potential 25-basis-point rate cut at its [Fed] September meeting."
“A rate cut in September would mark the first step in that adjustment, and could put downward pressure on long-term yields, offering some relief to prospective home buyers facing elevated mortgage rates and prices," he added.
CME Group’s FedWatch tool, a widely followed barometer of market expectations, now projected a near-100% probability of cuts at each meeting through year-end.
For mortgage professionals, the Fed’s next move will have direct implications for borrowing costs and housing demand. While shelter inflation remains elevated, its steady decline from last year’s peaks offers some relief for the sector.
