Fed Rate Cut in September Is a Done Deal!

Wall Street traders widely expect that tonight’s release of the U.S. August Consumer Price Index (CPI) will show persistent elevated inflation. However, given the particularly dismal nonfarm payroll data earlier, few industry insiders believe this inflation report can alter the fate of a Fed rate cut in September.

Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, pointed out that options traders are currently betting the S&P 500 will see only a mild move of about 0.7% after tonight’s CPI release. This priced range is lower than the average actual move of 0.9% on CPI release days over the past year and also below the market’s volatility expectations for the October 3 nonfarm payroll report.

The weakness in U.S. employment data has been severe enough to threaten economic growth, which has seemingly pushed the importance of inflation data to the background for now. The market currently expects the Fed to cut the federal funds rate by 25 basis points after its September 17 meeting, with possible additional cuts in October and December.

Given that the market has already priced in more than 100 basis points of rate cuts over the next year, Wall Street is closely monitoring the Fed’s policy moves. While the inflation data is unlikely to change the September rate cut decision, a higher-than-expected inflation reading could still disrupt the Fed’s subsequent easing process.

Andrew Tyler, head of global market intelligence at JPMorgan, stated in a client note on Monday: “We do not believe the current data pose a credible threat to force the Fed to hold steady in September. However, significantly hawkish data would lead to adjustments in the Fed’s policy easing path for the October and December meetings.”

Recently, several major banks have adjusted their rate forecasts based on the assumption that the Fed will cut rates more than previously expected. For example, Barclays economists now expect the Fed to implement three 25-basis-point rate cuts this year, with two additional cuts in 2026.

Tonight’s CPI report will be another critical piece in the data puzzle for U.S. traders to analyze, providing further clues for assessing the Fed’s interest rate path.