The "last mile" of the U.S. Federal Reserve's battle against inflation may have shortened to a last lap after consumer prices fell in June, a long-awaited slowing of shelter cost increases took shape, and markets began pushing down yields on bonds and inflation-protected securities.
Over the past three months consumer prices have risen at just a 1% annual rate.
Traders reacted swiftly, pricing in about a 90% chance of a September rate cut after the report, up from about 70% earlier, and also boosting bets on a second rate cut in December. They also priced in an increasing, but still less than 50-50, chance that the Fed will squeeze in a third rate cut by year's end.
"The doves have what they need" to cut rates even as soon as the upcoming July 30-31 meeting, said Renaissance Macro Head of Economic Research Neil Dutta. While that may be too abrupt for a central bank that, when possible, likes to flag decisions in advance to let the public adjust over time, he said rate cut proponents "should not leave the table unless (Fed chair Jerome) Powell agrees to make a strong signal" for a cut in September.
Powell may not take much persuading.
Fed officials consider that rate "restrictive" on the economy, and between the easing of price pressures and a still modest but steady rise in the unemployment rate they have begun actively considering rate cuts and becoming more concerned about slowing the economy too much.
June's consumer price report may help solidify the case to begin easing policy, with a report Friday on producer prices another potential building block.
The slowing of shelter inflation to 0.2% on the month, the weakest since August of 2021, was "clearly the most important development," said Inflation Insights President Omair Sharif, since Fed officials have been confident housing costs were slowing but were reluctant to act on that basis before it showed up in official data.
Powell speaks in public again on Monday at the Economic Club of Washington, a prominent platform to share how the latest round of inflation is being interpreted by the central bank.
There will be particular focus on what changes may be made in the Fed's July policy statement, and whether officials have decided they no longer need to refer to inflation as "elevated."
Before the next meeting the Fed will receive a report on the Personal Consumption Expenditures Price Index for June. The PCE index is used to set the Fed's 2% inflation target and was last reported at 2.6%. The first estimate of second-quarter economic growth will also be out by then, with Fed officials generally expecting the economy to be growing near trend but slower than last year.
"Today's data sets the Fed up for September-December rate cuts, with the groundwork being laid at the July 31 meeting," said III Capital Management Chief Economist Karim Basta.
