Fed's Changing Language on Inflation Points to September Rate Cuts

In September 2021, after enduring several months of high inflation, the U.S. Federal Reserve began describing inflation as "elevated." With the personal consumption expenditures (PCE) price index now at 2.6% and still falling, the Fed's upcoming policy meeting could mark the end of this elevated inflation description. This shift would signal the potential for interest rate cuts as soon as September, a move investors see as increasingly likely. The language change would reflect the Fed's growing confidence that inflation is moving sustainably toward its 2% target. Fed officials have started using phrases like "drawing closer" to a policy shift, indicating a possible adjustment in the economic outlook. With new PCE data expected before the meeting, the Fed will reassess the situation to determine the appropriate response. Market Overview:

• The Fed may downgrade its inflation description, signaling potential rate cuts.
• New PCE data expected before the Fed's policy meeting will influence decisions.
• Economists call for a more aggressive acknowledgment of cooling inflation.

Key Points:

• Fed officials use phrases like "drawing closer" to describe the distance to a policy shift.
• Recent data shows significant deceleration in rental prices, supporting inflation cooling.
• The Fed's evolving description of inflation reflects its growing confidence in reaching the 2% target.

Looking Ahead:

• The Fed's potential language change could signal rate cuts as early as September.
• New PCE data will be crucial in shaping the Fed's policy decisions.
• Continued cooling of inflation may prompt the Fed to adjust its economic outlook.

Economists argue that the Fed should acknowledge the cooling inflation more aggressively. Recent data, such as a new housing inflation indicator, shows a significant deceleration in rental prices. This trend supports the argument for downgrading the inflation description and considering rate cuts in the near future. The Fed's description of inflation has evolved since 2021, starting with "has risen" and shifting to "elevated" in September 2021 as inflation surged. Now, with inflation falling steadily, the Fed is poised to update its language and signal a new phase in its monetary policy, potentially leading to rate cuts in September.