New inflation data will probably keep Fed on track to cut rates next month

All told, the report will probably move central bankers closer to cutting interest rates at their next policy meeting in September. For months, Fed officials have said they won’t trim borrowing costs until they’re confident inflation is easing to normal levels. Now that they’ve come about as close as possible, officials are increasingly acknowledging the risks of keeping rates too high for too long. Already, hiring has slowed down, and global markets are jittery over whether the Fed might have put too much pressure on the economy overall.

In the meantime, families and households are feeling long-awaited relief from price increases, especially on key budget items like food and housing. Rent costs have been cooling for some time now, but economists were puzzled about why that shift wasn’t showing up in official statistics until this summer. Gas costs are down compared with last year. And the prospect of rate cuts starting next month would give more breathing room for those looking to get mortgages, auto loans or grow their businesses.

In the backdrop, Republicans and Democrats are crisscrossing the country trying to attract voters to their economic agendas. Inflation routinely polls as a top reason many Americans don’t think the economy is working for them, even while other metrics such as the job market and consumer spending remain strong. GOP nominee Donald Trump often slams Democrats for massive spending during the pandemic that helped supercharge inflation. Meanwhile, Vice President Kamala Harris argues her proposals would help the middle class and that Trump’s plans for mass deportations and spiked tariffs would make inflation worse.

The Fed has made major progress on its inflation fight since prices took off in 2021. Since then, officials hoisted the benchmark interest rate to the highest level in more than two decades, in an aggressive attempt to slow the economy at any cost. The result has turned out better than just about anyone predicted, with robust growth, low unemployment and rising wages accompanying cooling inflation. (The Fed wants inflation to rise 2 percent each year, but that’s using a different inflation gauge from the one released Wednesday. That gauge rose 2.5 percent in June on an annual basis.)

The fear, though, is that the economy will begin to crack under the continued weight of high rates. A weaker-than-expected July jobs report stoked fears of a downturn, with that anxiety quickly rippling through the financial markets over a dicey day of trading last week. And even though the job market isn’t being gripped by widespread layoffs and the markets quickly stabilized, the recent panic has put a spotlight on the Fed, which decided to hold rates steady last month instead of starting to cut. With no meeting in August, some observers wondered if the Fed should have lowered rates in July.

Now, though, the overwhelming forecast is that the Fed will announce a rate cut at its next meeting in September, possibly by a larger half-point cut if policymakers think the economy is slowing too much. Analysts also expect that the Fed — playing a bit of catch-up — will cut at the year’s remaining meetings in November and December, too. (A November cut would be notable because that meeting falls the week of the presidential election, when the central bank would otherwise avoid anything that affects politics at all costs.)

Fed leaders have made clear that no decisions are set in stone, and depend entirely on the data. But it’s clear that leaders are more confident in their progress against inflation than at any time over the past few years.

Speaking at a news conference in late July, Powell said the recent string of encouraging reports was even better than how things looked in late 2023. Last year, much of the fall in inflation came from a rapid decline in goods prices, as people pulled back on all of the couches, treadmills and home office equipment they had bought during the pandemic. Now, Powell said, there’s a “broader disinflation” taking hold.

“This is so much better than where we were even a year ago,” Powell said. “It’s a lot better. The job is not done, I want to stress that, and we’re committed to getting inflation sustainably under 2 percent. But we need to take note of that progress.”

Still, that progress looks different across the economy. Speaking to The Washington Post earlier this month, Chicago Fed President Austan Goolsbee said that when he travels across his district — which includes Iowa and most of Illinois, Indiana, Michigan and Wisconsin — businesses say supply chain issues from the pandemic have largely cleared. But many companies are still frustrated that they can’t pass their rising operating costs on to customers, because people are already so sensitive to more price increases.

Goolsbee also said there’s a disconnect between wages for low-income Americans rising faster than inflation — and the reality of high costs for the basics.

“Low-income people are getting squeezed in every way,” Goolsbee said.