The Fed is primed to cut rates next month.

Thanks to a situation straight out of their playbook:

You have a rare line up of: the Fall-Guy (the US BLS reported earlier this week that there were 818,000 fewer Non-Farm Payroll jobs than originally reported; the unemployment rates for May, Jun, Jul at 4%, 4.1% and 4.3% are the highest ever since Jan 2022); and the Stumble-Guy (the CPI prints for May, Jun, Jul were at 3.3%, 3% and 2.9%).

So, it all hunky-dory then and the case is made for the first rate cut?

When viewed strictly against its dual mandate of ‘maximum employment’ and ‘price stability’, the Fed appears to have closed this out. Afterall, CPI YoY prints of 3.3%, 3% and 2.9% are indicative of ‘price stability’.

But the Fed’s widely anticipated pivot next month does not come without a shadow of a doubt.

Here is an exercise to help you determine that ‘shadow of a doubt’:

Step 1: Type in www.bls.gov in your browser search bar

Step 2: This is the landing page of the fall-guy (contains information about the stumble-guy as well). Your task is to locate another little guy ─ The CPI Inflation Calculator.

Step 3: Plug in $100 in the first cell; Jul 2020 and Jul 2024 in the next two set of cells

Step 4: Click ‘Calculate’; you should see $121.40 on your screen.

In effect, you need $21.40 more today to match your Jul 2020 purchase.

That number ─ $21.40 ─ is the shadow of doubt that I was referring to earlier.

True, the Fed may point at price stability and say: Mandate achieved, Job done.

But has it done enough to restore the considerable loss in the USD’s purchasing power (PP) post-pandemic?

Let’s anchor a number to this: the annual avg CPI index value for 2020 was 259; for 2024 YTD its 312.

Which means the USD has lost about 17% in PP since the pandemic.

Is PP even a factor that could sway the Fed next month?

I don’t know.

The Fed commentary has traditionally remained anchored to price stability (the initial monster spikes in inflation that lift the base value of the CPI index ─ setting back PP (often permanently) in the process ─ are usually not referenced)

But Powell’s Fed is in a sweet spot today to tackle this post-pandemic loss in PP.

With an economy that’s continuing to grow. A job market that’s showing strains, but still holding up well. A disinflationary trendline that’s broken 3%. And finally, the silver bullet: a sticky 2+% real interest rate.

Has the PP of the USD ever increased?

It did.

Was in a different era though. When there was a Gold Standard.

Between 1929 – 1933, the PP of the dollar increased due to (1) deflation (there were 4 consecutive annual CPI YoY readings of 0.6%, -6.4%, -9.3% and -10.3%) and (2) a near 30% contraction in the money supply.

The last time the US registered a negative inflation print was in 1954 when the CPI Index deflated by 0.7%

So, what’s it going to be next month?

A pyrrhic victory?

Or a rare new narrative that balances duties towards both price stability and PP?