Tame Producer Inflation Supports Case for Another Fed Rate Cut in September

US producer prices increased moderately in July, lifted by a rebound in the cost of energy products, while underlying producer inflation retreated, which could allow the Fed to cut interest rates again next month.

The benign inflation report from the Labor Department on Friday could boost expectations for a half-percentage-point cut at the Fed’s 17-18 Sept. policy meeting.

Last Friday, President Trump urged the Fed to lower rates by a full percentage point, saying there was “no inflation in our country.”

Financial markets have fully priced in a 25-bpts rate cut following a recent escalation in the bitter trade war between the United States and China, which led to an inversion of the US Treasury yield curve Wednesday, and raised the risk of a recession.

Fears about the trade dispute’s impact on the economic expansion, the longest on record, prompted the Fed to lower its short-term rate for the 1st time since Y 2008 earlier this month

Weak producer prices are a reflection of a dramatic slowdown in manufacturing due to the global trade dispute. So, we expect a 2nd rate cut by the Fed in September as the manufacturing sector and world economies continue to slow.

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