Fewer Reasons for Another Fed Cut

Just like that, Federal Reserve policy makers have two fewer reasons to cut rates when they meet next month. They may cut them anyway.

On Tuesday morning, the Labor Department reported that inflation is starting to run a bit warmer. Overall consumer prices rose 0.3% in July from a month earlier, while core prices, which exclude food and energy items to better capture inflation’s trend, rose 0.3% as well. That put core prices up 2.2% versus a year earlier, the largest increase since December.

Even 2.2% counts as tame, and suggests that the Fed’s preferred measure of core prices, which runs cooler than the Labor Department’s, will remain below the central bank’s 2% inflation target. Still, after the two largest back-to-back monthly increases in core prices since 2006—when, as JPMorgan Chase economist Michael Feroli points out, the Fed was on the inflation-fighting warpath—it is harder to get worked up about “too low” inflation. Especially with the unemployment rate at 3.7%.

Then, shortly after the inflation figures came out, the Trump administration said it would delay tariffs on Chinese cellphones, laptop computers, toys and some other items until Dec. 15. That greatly reduces the scope of imports—originally some $300 billion worth—that were set to be hit with a 10% levy on Sept. 1. Stocks shot higher, long-term Treasury yields rose, and the possibility that the U.S. is facing a marked slowdown—one that the Fed would want to get ahead of by cutting rates—seemed radically diminished.

Nonetheless, interest-rate futures markets still suggest that investors believe a September rate cut is a sure thing. That alone might count as a reason for the Fed to ease, since holding rates steady when everyone thinks they are heading lower could prove disruptive.

But this isn’t a great reason to lower rates—or at least not a great reason for a central bank to say out loud. If and when a cut comes next month, it will be interesting to hear the Fed’s explanation for it.

At a press conference following the Federal Reserve’s rate-cut announcement, Fed Chairman Jerome Powell explained that there was an “insurance aspect” to the decision. Photo: Reuters (originally published July 31, 2019)

Write to Justin Lahart at justin.lahart@wsj.com

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