Does today's inflation data promise another interest rate cut from the Fed?

After inflation peaked in early 2022, the Federal Reserve repeatedly stated that its goal with aggressive interest rate hikes was to reduce inflation to an annual target range of 2%. Well, it's almost there.

Today's consumer price index, which measures the cost of food, housing, gas, utilities and other goods in the month of September, shows prices rose 2.4% year over year. That's slightly higher than markets expected, but still lower than the 2.5% figure in August. The core CPI, which excludes volatile food and energy costs, rose 3.3%also just above expectations.

The next question is what impact this number will have on the Fed's actions at its next policy meeting on November 6th and 7th. The Fed cut interest rates by 0.5% on September 18, marking the first step we expected to lower borrowing costs.

But market observers are not expecting another massive rate cut next month. Some even say the Fed won't cut interest rates at all.

The Fed's two main goals are to maintain maximum employment and contain inflation. Even though prices for goods and services are no longer reaching record highs, the economy is sending mixed hot and cold signals.

The latest employment report from the Bureau of Labor Statistics showed that U.S. hiring exceeded expectations in September. Instead of higher unemployment figures, the unemployment rate fell slightly. The outlook now appears to be a reversal from August's economic data, which stoked recession fears and led to a larger-than-expected Fed rate cut.

“Although the Fed remains vigilant on inflation, the labor market has come to the fore. The Fed doesn't want the labor market to go from weak to damaged,” said Charles Doughtery, senior economist at Wells Fargo.

Experts agree that the Fed can and should cut interest rates further. But assuming the bottom doesn't drop precipitously, this doesn't have to happen at breakneck speed. In other words, there is no longer any urgency to make an aggressive cut.

A modest 0.25% interest rate cut at the next meeting could help inflation ease further and avoid a recession with job losses, according to Beth Ann Bovino, chief economist at the U.S. Bank. This would help the economy achieve a “soft landing”. “Because landings are often the riskiest part of a flight, the Fed must be alert to looming concerns,” Bovino said.

Although unemployment is still at historic lows, it has risen steadily compared to last year, and the Fed should not risk it rising even further. At the same time, Bovino noted that “it is becoming increasingly difficult for many households (particularly low-income households) to continue paying higher prices for food, utilities and housing.”

What smaller Fed rate cuts mean for your money

The Fed's interest rate cuts have a double impact on your wallet. Reductions in interest rates affect the cost of borrowing money, whether by loan or credit card. They also determine how much you earn from the money you deposit into a high-interest savings account or certificate of deposit.

As the Fed lowers interest rates, you will be charged fewer fees for borrowing money. You will also see lower returns on your savings.

However, the Fed does not cut interest rates all at once. Over the next 18 months, the Fed will make gradual interest rate adjustments, probably by 0.25% each. And it will take time for these policy changes to filter through to the economy.

According to Bovino, most U.S. consumers will not feel the magnitude of a rate cut, be it 0.25% or 0.5%, in the near future. Financial institutions often increase borrowing costs quickly but lower them slowly to maximize profits.

“Because credit cards respond more slowly to Fed policy than mortgage rates, households, particularly low-income households that increasingly rely on credit cards to cover their costs, will continue to feel affordability challenges in the near term,” Bovino said.

The Fed does not directly set mortgage rates, but its policy adjustments and economic outlook influence interest rate movements. For example, although home loan interest rates fell dramatically this summer in anticipation of a rate cut, they have already risen again. Smaller rate cuts mean mortgage rates may not fall significantly in the near future.

For savers, many banks have already lowered their annual percentage returns on savings accounts and CDs. Since the Fed is likely to take its time cutting interest rates, you can expect above-average returns on your deposits for a few more months.

Overall, cooler inflation and interest rate cuts are providing a little more leeway in household budgets.