As the CPI data release approaches, the financial markets are holding their breath. If the data continues the recent trend of the PPI and shows a significantly lower-than-expected outcome, this will not only affect the direction of monetary policy in the fourth quarter but may also have a profound impact on the rate cut path for 2026.

The upcoming Federal Reserve FOMC meeting will not only decide whether to cut interest rates by 25 basis points or 50 basis points, but more importantly, it will release a new dot plot to provide guidance on the future direction of interest rates for the market. Given the current optimistic economic data, this dot plot is likely to be more dovish than the market previously expected.

Currently, the money market has begun pricing in a cumulative reduction of over 100 basis points by the end of 2025. If the September meeting only signals a one-time rate cut of 25 basis points, it is likely to fall short of the market's expectations for future easing policies. Therefore, the Federal Reserve is more likely to demonstrate a path of more frequent rate cuts in the future by lowering the median interest rate level.

With inflation cooling and the job market weakening, the market seems to be crying out for help, which will undoubtedly increase the pressure on the Federal Reserve to cut interest rates, potentially forcing it to implement larger and more frequent rate cuts.

This week's market reaction to economic data will largely determine whether the rate cut in September will be 50 basis points or 25 basis points. The Federal Reserve needs to carefully weigh its options to avoid excessive market reaction to a 50 basis point cut. Even if there is an internal inclination within the Federal Reserve towards a 50 basis point cut, they need to alleviate market tension through recent operations to avoid drastic fluctuations caused by sudden policy changes.

Ultimately, the CPI data released tonight will be the final and most critical reference indicator for the extent of interest rate cuts in September. Let us wait and see how this data will influence the Federal Reserve's decisions and the direction of the entire financial market.