Get Ready for Interest Rate Cuts in September, Analysts Say

The Federal Reserve is now widely forecasted to cut interest rates by September after new inflation numbers came in lower than expected.

The latest consumer price index (CPI) report showed that inflation has cooled to a 3% annual rate, tying the lowest level since March 2021. Overall, prices declined 0.1% for the month.

Even before the release of the CPI data Thursday, expectations for a September rate cut were firming because the unemployment rate ticked up to 4.1% in the June jobs report last week. (The Fed has a dual mandate to support employment and keep inflation in check — ideally around a target rate of 2%.)

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Following the latest jobs and inflation reports, there's a growing consensus that nearly enough progress has been made in the fight against inflation for the Fed to cut rates, which would lower borrowing costs and theoretically boost hiring and economic activity in general.

How soon will the Fed cut interest rates?

The Fed meets four more times this year — in July, September, November and December. After the June CPI reading, most observers now expect two or three rate cuts by the end of the year. The CME Group’s FedWatch Tool now shows a greater than 92% probability of a cut by September. But analysts' predictions vary for exactly when and how many Fed rate cuts are coming.

Josh Jamner, investment strategy analyst at ClearBridge Investments, said Thursday’s inflation report positions the Fed for a rate cut in September. “The committee is looking to gain confidence that inflation is on a path to eventually return toward the 2% target, and today’s print combined with the May inflation data should help put committee members' minds at ease,” he said in a note.

Prices for flights, gas, cars and energy all declined in June, contributing to the lower inflation rate. Meanwhile, rent and homeownership costs increased by the smallest amounts in nearly three years. “This moderation has been long awaited and is crucial to our forecast that inflation will continue to recede in 2024,” Moody’s Analytics economist Matt Colyar said in a note.

Why is inflation slowing down? For one thing, consumers appear to be “more sensitive to price increases after several years of high inflation, and more willing to switch brands, substitute chicken for beef, or order water instead of soda at a restaurant,” Bill Adams, chief economist for Comerica Bank, said in a note. Business are taking note and pumping the brakes on price increases, or even offering special deals.

“The CPI report won’t be enough to convince the Fed to cut interest rates at their decision this month, but a rate cut at the following decision in September is quite likely,” Adams said.

ZipRecruiter's Chief Economist Julia Pollak noted that this CPI report marks the first time since the pandemic that prices fell month over month.

“Markets had already been pricing in a rate cut in September, and today’s CPI report raises the likelihood even further,” Pollak said in a note. “Rate cuts will come as a relief to families who want to buy homes or cars, those with revolving debt, and businesses that want to expand.”

While a September rate cut appears to be the most likely scenario, the July meeting could be in play, too. If unemployment continues to rise, Fed officials may decide they need to intervene.

“The Fed could very well lower rates sooner than September if the labor market softens at a faster clip,” Quincy Krosby, chief global strategist for LPL Financial, said in a note.

Others are less bullish on rate cuts. Bank of America, for example, is still forecasting that the first cut will come in December. However, even their analysts acknowledged that “risks are tilting towards an earlier start date” in a report reacting to the CPI release.

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