Rate cuts are on everybody’s mind following the release of the surprisingly cool June consumer price index (CPI) data. Will the Federal Reserve cut rates?
Well, evidence is certainly in favor of at least one cut this year. The June CPI showed that inflation didn’t just slow but reversed last month. Indeed, prices actually fell about 0.1% in June according to the CPI, the first deflationary reading for the report since May 2020. Annual inflation came in at 3% in June, the lowest level in more than a year.
For a Wall Street that has held their breath all year in hopes of a rate cut, the CPI may as well have been Christmas in July. Indeed, for months Fed officials have repeatedly stated they are simply waiting for “more good data” before pulling the trigger on a rate reduction. Seriously. Fed Chair Jerome Powell reiterated the point just this week.
“After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Powell told Congress recently. “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”
Well, if its good data they want, the June CPI should fit the bill and then some.
Will the Fed Cut Rates?
The CPI isn’t the only metric hinting at rate cuts to come. Indeed, the June jobs report released last Friday and showed an unemployment rate of 4.1%, up from 4% in May which was, at the time, the highest jobless level since January 2022.
While the economy still added more than 200,000 jobs in June, far from recessionary levels, the elevated unemployment level suggests that restrictive interest rates are weighing down the U.S. labor market. The Fed has repeatedly warned of a potential recession should interest rates fail to be reduced in time. With the CPI coming out cool and the labor market slowly but surely softening, conditions certainly point to at least one rate cut this year
Despite the promising nature of the June CPI, the CME FedWatch Tool still estimates a less than 10% chance that the Fed cuts rates at the July meeting. However, it now predicts an 84.6% chance of a 25 basis-point rate reduction at the September meeting and an 8.1% chance of a 50 basis-point cut. This is notably higher than just days ago, prior to the CPI release.
“The decline in the consumer price index between May and June won’t stick but it strengthens the case for the Federal Reserve to begin cutting interest rates in September, particularly as the labor market has softened,” noted Ryan Sweet, Oxford Economics Chief U.S. Economist.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
