Last week, the Federal Reserve delivered its first rate cut since the onset of the COVID-19 pandemic. Historically, reductions in the fed funds rate have occurred in response to slowing economic activity, falling inflation, or external shocks like the dot-com bubble burst, the global financial crisis, or the pandemic. This time is different. After succeeding at bringing inflation down and restoring balance in the labor market, the Fed is acting to preserve a ‘soft landing’.

While headline inflation has eased, partly due to improvements in supply chain issues, core inflation has also moved lower along with cooling aggregate demand. In August, core prices, as measured by the personal consumption expenditures (PCE) index, increased by 0.16%, essentially unchanged from July’s rise. Although core inflation remains 2.6% higher than a year ago – still above the Fed’s target – it is moving in the right direction, maybe even faster than anticipated. Over the past three months, core inflation increased at an annualized rate of just 1.7%, compared to a 2.5% rate over the previous six months.