The latest data from the Commerce Department revealed a significant easing of inflationary pressures in the United States for June, which has reinforced market expectations for a Federal Reserve interest rate cut anticipated around mid-September. The headline Consumer Price Index (CPI) for June registered an annual rate of 3%, down from May’s 3.3% and just below the consensus forecast of 3.1%. This decline was underscored by a monthly decrease of 0.1%, marking one of the most substantial drops seen in over three years, largely driven by a notable 4% decline in gasoline prices.
Core inflation, which excludes volatile components such as food and energy prices, also exhibited a slowdown, recording an annual rate of 3.3%. This figure represents the lowest level in more than three years and came in slightly better than the expected 3.4%. The month-on-month core inflation rate was in line with expectations at 0.1%, down from the previous month’s final reading of 0.3%.
Seema Shah, Chief Global Strategist at Principal Asset Management, commented on the implications of these inflation figures, stating that they firmly position the Federal Reserve to consider a rate cut in September. Shah emphasized that the moderation in core CPI figures provides the Fed with confidence that earlier spikes in inflation during the first quarter were transitory, potentially opening the door for multiple rate reductions throughout the year.
Despite the positive market reaction to the inflation data, Shah noted that a rate cut in July remains unlikely, with September being viewed as a more realistic timeframe. This assessment stems from the need for additional economic data to support the case for easing monetary policy further. The combination of robust job market data alongside decelerating inflation has been received positively by equity markets, prompting initial recoveries in U.S. stock futures following the CPI release.
In response to the data, benchmark 10-year Treasury note yields saw a notable decline of 9 basis points to settle at 4.197%, while 2-year notes dropped 11 basis points to 4.511%. The U.S. dollar index, a gauge of the dollar against a basket of major currencies, also fell by 0.84% to 104.171.
Federal Reserve Chairman Jerome Powell, in his testimony before the Senate Banking Committee, acknowledged the broader economic slowdown and highlighted the need to balance risks associated with monetary policy decisions. Powell noted that while labor market conditions have moderated from previous highs, the economy faces dual challenges of inflationary pressures and potential dampening effects on economic activity.
Looking forward, market sentiment, as reflected in CME Group’s FedWatch tool, indicates a minimal 10% probability of a rate cut in July, contrasting sharply with an 85% likelihood of a reduction in September, up from 70% prior to the latest CPI data release. The Federal Reserve continues to navigate a delicate path, seeking to support economic growth while managing inflation expectations amid ongoing fiscal policies and global economic uncertainties.
As investors await upcoming economic indicators, including GDP figures and additional inflation reports, the Fed’s future policy decisions are expected to pivot significantly on maintaining economic stability and fostering sustainable recovery.