It’s time for the Fed to end the waiting game

Why wait until September?

That is the question hanging over markets after Thursday’s surprisingly weak inflation reading. There doesn’t seem to be much reason for the Federal Reserve to put off cutting rates any longer, and waiting too long carries risks of its own.

The Fed’s publicly stated criteria for a rate cut, that it can be confident inflation is moving down toward its 2% target, appears to have been met. The core consumer-price index, stripping out food and energy, rose just 3.3% in June from a year earlier—the slowest pace in over three years. This year-over-year core CPI rate has either slowed or stayed the same for 16 straight months, making the market’s freakout over a supposed inflation rebound earlier this year look decidedly overblown.

What is more, it is unclear what catalysts there could be on the horizon to drive a resurgence in inflation. As Fed Chair Jerome Powell highlighted in congressional testimony this week, the labor market is cooling, removing a driver of inflation and introducing downside risks to the economic outlook.

Meanwhile, warnings from consumer-facing companies that American shoppers are tapped out keep coming, and even seem to be rising in intensity. Tellingly, PepsiCo on Thursday blamed not just years of cumulative inflation but also high borrowing costs for weakness in sales of Frito-Lay snacks. It is in the Fed’s power to do something about the latter.

The possibility that the Fed could wait too long, and allow a downturn to gain momentum in the meantime, might help explain Thursday’s underwhelming market response to the CPI reading, at least in stocks. They have rallied recently when rate cut expectations have risen, but on Thursday the S&P 500 ended the day down 0.9%, while the Nasdaq fell almost 2%.

Reasons to wait until September are mostly procedural, not economic. There is no August meeting, and the end-of-July meeting is less than three weeks away. That gives the Fed little time for its usual practice of methodically preparing the market for a move.

This is apparently enough to convince investors that a July cut is only a remote possibility. As of Thursday afternoon, futures markets were pricing in only a 9% chance of one, according to the CME FedWatch tool. But the odds of a cut by September rose to 93% from 73% a day earlier.

The good news is that the Fed will likely keep sending dovish signals between now and September, driving bond yields and other market-determined rates lower. The yield on 10-year U.S. Treasury notes fell to 4.19% on Thursday, down from 4.70% in late April. More cuts could also come quickly afterward, with markets now pricing in at least three quarter-percentage-point reductions by January.

Still, the question remains: If the case for rate cuts is so settled, why subject everyone to months of anticipation? A pleasant surprise just might be awaiting investors during the dog days of summer.

Write to Aaron Back at aaron.back@wsj.com