With the U.S. Consumer Price Index (CPI) for July rising in line with market expectations, a consensus is emerging in financial markets that the Federal Reserve (Fed) will cut its benchmark interest rate in September. Some analysts suggest that the key issue may not be whether a rate cut will occur, but rather whether the Fed will opt for a "big cut" of 0.5 percentage points or more at once. As a result, the global preference for risk assets, driven by expectations of a rate cut, is expected to continue for the time being.
Park Sanghyun, a researcher at iM Securities, stated in his report "U.S. July CPI, Firming Up a September Rate Cut" on August 13, "The reason financial markets have entered a 'September rate cut is a done deal' mode is that inflationary pressure driven by tariffs has remained limited."
The U.S. July CPI, released the previous night Korean time, rose 2.7% year-on-year, matching market expectations. Immediately after the release, the yield on the U.S. 2-year Treasury note, which is sensitive to monetary policy, declined, and in the interest rate futures market, the probability of the Fed cutting rates at the September Federal Open Market Committee (FOMC) meeting soared to over 94%.
Park pointed out that the reason markets are strongly betting on a September rate cut is that, despite sharp increases in certain categories such as service prices, overall inflationary pressure remains limited, as evidenced by stability in goods prices directly affected by tariffs. He explained, "For example, in the case of goods prices that are directly impacted by tariffs, the increase in July was just 0.0% month-on-month and 0.7% year-on-year. The negative effects of tariffs did not significantly disrupt U.S. goods prices."
He added, "Given that oil prices have recently fallen to the low $60s per barrel, it is expected that the August inflation figures, which will be released before the September FOMC meeting, will also remain stable at current levels," and predicted, "From the Fed's perspective, it will be difficult to ignore the pressure to cut rates."
Accordingly, some analysts believe that the market's focus will shift from the rate cut decision itself to whether a big cut will take place. Park said, "As July consumer prices remain stable, calls from the Donald Trump administration for a rate cut and a big cut are likely to intensify." U.S. Treasury Secretary Scott Besant publicly stated immediately after the CPI release that the Fed should cut rates by 0.5 percentage points in September.
Park also noted, "Depending on the content of upcoming employment data, it is possible that the Fed may consider a big cut, similar to what happened in September last year," and concluded, "We maintain our previous outlook that the global preference for various risk assets, based on expectations of a rate cut, will persist for the time being."
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