The price and labor market data for the U.S. economy -released this week- are part of the run-up to the September monetary policy meeting, which will take place on September 17-18 and at which it is widely expected that the members of the Federal Open Market Committee (FOMC) will finally decide to begin the process of cutting the Fed's key policy rate.

With the August figure, inflation in the United States completed five consecutive months of declines, registering a monthly variation of 0.2%, which decreased to 2.5%, from 2.9% in July, below consensus projections and also becoming the lowest reading since February 2021.

In the month, the largest downward contribution came from fuels. A lower increase in the price of food, transportation and vehicles also contributed. However, a 0.5% monthly increase in housing costs stood out.

As for core inflation, the Fed's preferred indicator for monitoring prices, the data was not so encouraging, as it registered a variation of 0.3% on a monthly basis, higher than the 0.2% expected. In annual terms, it remained unchanged at 3.2%, which is the lowest level recorded for this indicator in more than three years.

The Producer Price Index (PPI) was also released, which showed a monthly increase of 0.2%. In annual terms, producer inflation stood at 1.7%, the lowest level in six months.

On the other hand, the labor market continues to weaken. The most recent data on jobless claims for the week ending September 7 shows an increase of two thousand claims from the previous week, to two hundred and thirty thousand. This figure is already well below the averages seen at the beginning of the year.

Recall also that during the Jackson Hole meetings in late August, Jerome Powell, chairman of the Fed, noted that, "the time has come to tighten policy. The direction to follow is clear and the timing and pace of adjustments will depend on incoming data, the evolving outlook and the balance of risks.".

All in all, it is quite reliable to believe that we will have a cut. The point of discussion is still whether it will be 25 or 50 bp. Here it is important to consider that historically the FED has been conservative in its rate movements, which are normally 25 bp and have been higher at times of crisis. Furthermore, although the economy is going through a slowdown process, we are not - for the moment - facing a recession scenario. We should also keep an eye on the fact that, although inflation continues to cool down, the CPI without volatility has been half stagnant and that the PPI without volatility, in fact, increased in the last measurement.

Finally, the effect that a 50 bp cut could have on the markets should not be underestimated, which would not only attract high volatility -mainly for short-term assets- but could also give wrong signals of a further deterioration in the economy and/or that the Fed is behind the curve.

Definitely, a moment of delicate balance. In case there were any doubts, I would like to clarify that I still think, as the majority of the market as of today, as shown by the CME FedWatch Tool, that 55% believe that this first cut should be a prudent 25 bp.

We will toast from these distant lands to Powell and his friends to make the best decisions.

Milene Rodriguez

Strategy and Investment Analyst