Inflation Dip Puts Pressure on Fed to Cut Rates [CNET]

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Inflation dropped below 3% annually for the first time since March 2021, strengthening expectations that the Federal Reserve will cut interest rates in September.

US prices rose 2.9% year over year in July, according to the latest Consumer Price Index data released by the Bureau of Labor Statistics. Core inflation, which excludes volatile food and energy prices, rose 3.2% annually in July, the smallest increase since April 2021.

“Overall, this report suggests that the worst of inflation might be behind us, giving the Fed room to consider easing up on interest rates at their next meeting,” said Andrew Latham, a certified financial planner and managing editor of Supermoney.com.

If all goes to plan, the central bank’s easing of interest rates should reduce some stress on household budgets, helping to stimulate borrowing and encourage spending.

Will the Fed cut rates in September?

Most experts now expect the Fed to make a rate cut at its next meeting on Sept. 17-18.

The battle against inflation has been the primary focus of the Fed, which has kept interest rates high to curtail business and consumer activity. But a recent increase in unemployment has put pressure on the Fed to reverse course to avoid a recession. 

“It is time for the Federal Reserve to declare ‘mission accomplished’ in its war against inflation, stop fighting the economy, and turn its focus to the employment part of its mandate,” Julia Pollak, chief economist at ZipRecruiter, told CNET by email. 

Following the July Federal Open Market Committee meeting, which kept the federal funds rate at a target range of 5.25% to 5.50%, Fed Chair Jerome Powell said a “rate cut could be on the table at the September meeting” if data continues to show inflation improving and the economy slowing down. The Fed’s next decision could be influenced by two upcoming economic reports: Unemployment figures on Sept. 6 and another inflation report on Sept. 11. 

Many economists are concerned that if the Fed keeps its foot on the brake pedal and doesn’t cut rates soon, it will have negative effects on the labor market. “Unemployment will continue to rise, and businesses — unable to afford loans to finance new investments — will be forced to stagnate and allow exciting growth opportunities to pass them by,” Pollak said. 

Most predictions forecast a 25 basis-point rate cut in September. But some are arguing the Fed should go for a deeper cut, like a 50 or 75 basis-point reduction, to avoid setting off a job-loss cycle, according to Pollak. 

What do lower inflation and interest rates mean for your money?

Adjustments to interest rates can affect many aspects of your finances. Higher interest rates for borrowers make it more expensive if you’re taking out a mortgage and paying off credit cards. 

Read more: How the Federal Reserve Affects Mortgage Rates in 2024

Lower interest rates make it more affordable to borrow. But lower rates also mean reduced earnings on your savings. Now could be the final time to lock in the best rates on CDs, high-yield savings accounts and money market accounts.

Regardless of what happens on a macroeconomic level over the next month, try sticking to practical financial advice from the experts. Starting an emergency fund and sticking with long-term investments can help you weather the ups and downs of the economy. 

“While we should stay cautious and prepared, it’s not time to hit the panic button,” said Latham. 

Even though prices aren’t as high as they were a few years ago, it’s still hard to afford daily essentials, like gas and groceries, as well as housing. Check out these ways to save for a little relief.

Tiffany Wendeln Connors is a senior editor for CNET Money with a focus on credit cards. Previously, she covered personal finance topics as a writer and editor at The Penny Hoarder. She is passionate about helping people make the best money decisions for themselves and their families. She graduated from Bowling Green State University with a bachelor’s degree in journalism and has been a writer and editor for publications including the New York Post, Women’s Running magazine and Soap Opera Digest. When she isn’t working, you can find her enjoying life in St. Petersburg, Florida, with her husband, daughter and a very needy dog.