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U.S. central bankers are poised to begin long-awaited interest rate cuts next week, most likely starting with a quarter-of-a-percentage-point reduction. This move aims to lower the possibility of a recession, despite persisting underlying price pressures that deter more aggressive action.

Market expectations for a half-percentage-point rate cut at the Fed’s upcoming policy meeting have decreased to less than a one-in-five chance, following the release of data showing a 2.5% increase in the consumer price index in August compared to a year earlier, down from July’s 2.9% rise. Excluding food and energy prices, core Inflation remained steady at 3.2%, reflecting the trajectory of prices.

Shelter costs, which had been moderating in recent months, accelerated on a year-over-year basis for the first time since March 2023. This indicates that core Inflation remains uncertain, prompting analysts to predict a quarter-percentage-point rate cut by the Fed.

Despite a slowdown in U.S. hiring in recent months, the unemployment rate dropped to 4.2% in August, providing some reassurance that the labor market does not require immediate aggressive support from the Fed. The latest CPI report gave policymakers additional reason to lower rates, but with caution.

In rate futures contracts, traders are now pricing a year-end policy rate of 4.25%-4.50%, suggesting a potential half-percentage-point rate cut at one of the Fed’s final two meetings of the year. The Fed will disclose policymakers’ individual expectations for the rate path at the conclusion of next week’s meeting.

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