Fed Rate Cuts Will Depend on Latest Price, Retail Data

Traders are convinced that the Federal Reserve will slash its benchmark federal funds rate at the next meeting in September— but by how much remains an open question. 

Probabilities based on the pricing of fed funds futures suggest that there is an even chance of a 25 basis point cut and a 50 bps cut.

Economic data released over the next month will largely determine any shift in those probabilities one way or the other. The bank's Federal Open Market Committee will announce its next decision on Sept. 18, the second day of its next meeting. 

This week, two big data points are in store. The first is the latest consumer price index report (CPI), scheduled for Wednesday morning.

Economists expect that the government will report that the core CPI, which excludes food and energy, grew by 0.2% month-over-month in July, while climbing by 3.2% year-over-year. 

An in-line number would likely do little to change traders’ rate cut views, but a notable deviation from the consensus may tilt the odds in favor of either a 25 or 50 bps cut. 

A cooler-than-anticipated print would likely ease some Fed officials’ lingering inflation worries and cause them to be more open to a bigger rate cut in September, while a hot inflation reading would likely dampen expectations of a big cut. 

Retail Sales Data Follows CPI Report

The CPI report will be followed a day later by the government’s latest retail sales figures. Economists are expecting that retail sales jumped by 0.4% in July.

While not as consequential as data on the labor market, data on retail sales will influence how the Fed and investors think about the balance of risks with regard to economic growth and inflation. 

Like with inflation, an in-line reading will probably do little to change traders’ views, but a deviation from the consensus could have an impact.

In particular, a weaker-than-expected reading could fan recent recession concerns, while a strong number may help put those concerns to bed.