What today’s inflation report means for the Federal Reserve

The big question on Wall Street is what the new data will mean for the Fed’s policy trajectory ahead — and investors on Wednesday interpreted the new data as likely to allow the central bank to slow its rapid rate increases.

The Fed raised interest rates by three-quarters of a percentage point in June and July, and officials signaled that another of those abnormally large increases is expected to be discussed at their next meeting. September 20 and 21. But investors are betting that slowing inflation and moderating inflation expectations could bolster support for a more modest move.

Still, Fed officials cautioned against overreacting to a data point.

“It can’t be just a month. Oil prices fell in July; this will carry over to the inflation report in July, but there is a lot of risk that oil prices will rise in the fall,” said Loretta Mester, president of the Federal Reserve Bank of Cleveland, during a recent appearance. It would be a mistake to “declare victory too soon”.

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