Better, but is it good enough?

Inflation data released last week improved, but perhaps not as much as the markets had hoped. Combined with views of the University of Michigan Consumer Sentiment survey, it seems that large reductions in inflation are behind us, leaving a more gradual pace ahead. 

The Federal Reserve meets on September 18, and all eyes are on the amount of federal funds cut (25 or 50 basis points), the economic projections and Chair Powell’s news conference. Market expectations on the magnitude have closely followed the economic data, meaning shifting back and forth, but have now landed firmly in the middle. 

Markets also have been assessing the strength of the economy to determine how much it is slowing. Too much would likely lead to a half-point reduction; just enough would warrant a quarter-point variety. Stable weekly jobless claim data indicate no imminent plunge in the labor market. The unexpected hiccup from housing costs in the August Consumer Price Index probably leads the Fed to cut by 25 basis points, but much depends on how Powell frames the debate.