The August Consumer Price Index (CPI) report dealt a sharp blow to hopes of swift and aggressive monetary easing by the Federal Reserve.

Speculators who were eyeing steep interest rate cuts may need to temper their optimism as the Federal Open Market Committee (FOMC) meeting on Sept. 18 approaches.

While the headline CPI slowed to a 2.5% annual increase—its lowest reading since February 2021 and below consensus expectations of 2.6%—the story beneath the surface is less reassuring.

Core inflation, which strips out the more volatile food and energy components, advanced by 0.3% on a monthly basis, above the 0.2% predicted. Year-over-year, core CPI remained elevated at 3.2%, well above the Fed's 2% target.

The stickiness of core inflation has decisively cooled any residual hopes of a more aggressive 50-basis-point rate cut.

Market-implied odds of such a cut have plummeted to just 15%, down sharply from 34% the previous day, as per CME FedWatch data.

The most likely scenario now points to a more measured 25-basis-point reduction in the federal funds rate at the upcoming meeting.

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Scope For Outsized Fed Cuts Narrows Amid Sticky Inflation Readings

Ed Yardeni, president of Yardeni Research, highlighted in a post-CPI report note that investors remain overly optimistic, pricing in two more rate cuts before year-end, including one as large as 50 basis points.

“They might be similarly disappointed by stronger-than-expected economic indicators up ahead,” he warned.

Yardeni explained that this monetary easing cycle is going to be notably different from previous ones.

Historically, the Fed has slashed rates aggressively in response to financial crises that quickly spiraled into credit crunches and recessions.

This time, however, the central bank is acting preemptively to avert a downturn, which suggests that fewer rate cuts may be necessary to achieve its goals.

Focus Shifts To PPI Report For Fresh Inflation Insights

The next significant data release on the Fed’s radar is the Producer Price Index (PPI) for August, scheduled for Friday at 8:30 a.m. ET.

Here are economist expectations to the August PPI report:

The PPI for final demand is expected to continue its downward trend, decelerating from 2.2% year-over-year in July to 1.8% in August. If realized, this would mark the second consecutive month of declining annual producer inflation.

On a month-over-month basis, the PPI is expected to show a modest increase of 0.1%, matching July’s reading.

The core PPI—which excludes volatile food, energy, and trade service prices—is anticipated to edge up slightly to 0.2% monthly, accelerating from an unchanged reading in July.

The annual core PPI is projected to rise from 2.4% in July to 2.5% in August.

Bottom line, the market’s optimistic view that the Fed can cut rates aggressively could face further challenges if the August PPI report reveals stubborn price pressures among U.S. producers.

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