The latest data released by the Commerce Department has provided a significant indication of easing inflation pressures in the United States, setting the stage for potential Federal Reserve interest rate cuts in mid-September. According to the Consumer Price Index (CPI) report for June, the annual inflation rate stood at 3%, marking a decline from May’s 3.3% and slightly below the anticipated 3.1% forecast by Wall Street analysts. This moderation in inflation was accompanied by a monthly decrease of 0.1%, one of the most substantial declines seen in over three years, largely driven by a notable 4% drop in gasoline prices during the month.
Core inflation, which excludes volatile food and energy components, also showed a slowdown, recording an annual rate of 3.3%. This figure represents the lowest core inflation rate observed in more than three years and surpassed expectations of 3.4% growth. The monthly core CPI increase of 0.1% met market expectations and reflected a reduction from May’s final reading of 0.3%.
Seema Shah, Chief Global Strategist at Principal Asset Management, interpreted these latest inflation figures as a clear signal for a potential rate cut by the Federal Reserve in September. She noted that while a rate cut in July appears unlikely, the combination of strong jobs data and decelerating inflation provides a favorable backdrop for equities as the year progresses.
Following the release of the data, initial market reactions included a slight softening in U.S. stock futures, which later rebounded. Futures contracts tied to the S&P 500 suggested a minor dip at the opening bell, while the Dow Jones Industrial Average was positioned for a modest decline. In contrast, the Nasdaq Composite, sensitive to interest rate movements, indicated a higher opening following recent record highs.
Bond markets also responded decisively, with yields on the benchmark 10-year Treasury note declining by 9 basis points post-release to settle at 4.197%. Meanwhile, yields on 2-year notes saw an 11 basis point drop to 4.511%. Concurrently, the U.S. dollar index, which measures the dollar against a basket of major currencies, slipped by 0.84% to 104.171, reflecting market expectations of potential accommodative monetary policy.
Federal Reserve Chairman Jerome Powell underscored these economic dynamics in recent testimony to lawmakers, highlighting the dual risks facing the economy: a cooling labor market and decelerating economic growth. Powell emphasized the Fed’s cautious approach, balancing the imperative to support economic activity against the need to tame inflationary pressures.
Looking ahead, investor sentiment and forthcoming economic indicators will continue to shape expectations regarding the Federal Reserve’s monetary policy decisions. The latest insights from CME Group’s FedWatch tool suggest an 85% probability of a rate cut in September, up from 70% prior to the CPI data release. This indicates growing confidence among investors in the Fed’s readiness to implement policy adjustments aimed at sustaining economic stability amid evolving global economic conditions.