An unexpected drop in U.S. consumer price inflation data for June may have shortened the Federal Reserve's "last mile" fight against inflation to the home stretch, boosting policymakers' confidence that they are winning the battle and paving the way for interest rate cuts in the coming months.
The Bureau of Labor Statistics said Thursday that CPI data slipped 0.1% last month after being unchanged in May, the weakest monthly reading since May 2020, early in the pandemic, while the year-on-year increase of 3% was the slowest gain in the past year.
Policymakers are expected to keep the policy rate at 5.25%-5.5% at their July 30-31 meeting, but they may reset the timetable for rate cuts given easing price pressures.
The Fed's next policy meeting after July is in mid-September. Traders were quick to react to Thursday's data, pricing in about a 90% chance of a rate cut in September, up from about 70% previously, and bringing forward expectations for a second rate cut to November, with about a 50% chance of a third rate cut before the end of the year.
JPMorgan Chase & Co. and Macquarie Bank brought forward their expectations for the first rate cut to September from November and December, respectively.
Neil Dutta, head of economic research at Renaissance Macro Research, said “dovish people” had a case for a rate cut at the July meeting or even earlier.
He added that while a July rate cut might be too sudden because the Fed likes to "let the wind out" ahead of time to give the public time to adjust, supporters of rate cuts "should not give up on the possibility of a July cut unless Powell sends a strong signal about a September cut."
Omair Sharif, president of Inflation Insights, said the slowdown in monthly housing inflation to 0.2%, the weakest since August 2021, was "clearly the most important development" because Fed officials have been confident that housing costs are slowing but reluctant to act until there is evidence in official data.
Next Monday, Powell will give a public speech at the Economic Club of Washington, an important platform for sharing how the Fed interprets the latest round of inflation. Fed Governors Waller, Kugler and Bowman are also scheduled to speak next week, which will be the last speech before the Fed officials enter the communication quiet period before the policy meeting on July 20.
Particular attention will be paid to any possible changes in the Fed's July policy statement and whether officials decide to stop referring to inflation as "elevated."
The article is forwarded from: Jinshi Data