CPI data will reveal the extent of the Fed's rate cut

On Wednesday, investors will see a crucial economic data - the August Consumer Price Index (CPI), which will directly affect the future direction of the Fed's interest rate policy.

The report will be released at 8:30 a.m. Eastern Time, and the overall inflation rate is expected to be 2.5%, a slowdown from 2.9% in July. The monthly consumer price increase is expected to be 0.2%, the same as last month.

In terms of core CPI (excluding volatile factors such as food and energy), the year-on-year increase in August is expected to be 3.2%, the same as in July. According to Bloomberg data, economists expect the monthly increase in core CPI to remain at 0.2%.

Although inflationary pressures have eased, the annualized inflation rate is still higher than the 2% target set by the Federal Reserve. Combined with the recent weak job market data, the market is almost certain that the Federal Reserve will take action to cut interest rates at the policy meeting on September 18.

Fed Chairman Powell also said at the Jackson Hole meeting last month: "It's time to adjust policy." This statement undoubtedly strengthened the market's expectations for a rate cut.

But the key question is how much the Fed will choose to cut interest rates. Wednesday's CPI report could provide more clarity on that decision.

"We expect the August CPI to continue to deliver the good news of falling inflation, further supporting the case for a September rate cut," said Stephen Junod and Jae-seo Park, economists at Bank of America, in a preview of the report.

As of Tuesday, the consensus expectation for a rate cut at the September meeting was close to 100%. However, market expectations for a 50 basis point or 25 basis point cut have shifted to 70/30 from a 60/40 split last week.