The latest sign that inflation is cooling makes it more likely that the Federal Reserve will be able to gain enough confidence to cut interest rates this fall.
Chances of a September cut increased on Thursday following the release of favorable new numbers from the Consumer Price Index (CPI), with traders now pricing in an 83% probability of an easing at the Fed meeting on 17-18 September.
“I think it puts September on pace for a downside,” Peter Tchir, head of macro strategy at Academy Securities, told Yahoo Finance.
Some Fed watchers even think a cut at the July 30-31 Fed meeting is now a possibility if some other pieces fall into place.
“The Fed could very well cut rates sooner than September if the labor market softens at a faster pace,” said Quincy Krosby, chief global strategist for LPL Financial.
The consumer price index on a “core” basis – which excludes volatile food and energy prices that the Fed cannot control – rose 3.3% year over year in June. That was a tenth of a percentage point below expectations and below the first level in May.
The month-on-month core CPI was also encouraging, rising 0.1% after rising 0.2% in May.
The “muted” month-on-month rise “strengthens the case for a September rate cut,” said Paul Ashworth, chief economist for Capital Economics.
However, much depends on the next reading of the Fed’s preferred inflation gauge – the “core” Personal Consumption Expenditure (PCE) index – as well as further cooling of the labor market, Ashworth added.
Richard de Chazal, macro analyst for William Blair, said the fact that June marked the third month in a row of more moderate increases in inflation helps “confirm that inflation is back on a downward trajectory”.
But he still doesn’t expect a smooth path to the Fed’s 2% inflation target, because annual comparisons of the change start to tighten during the second half of this year.
“To help justify the initiation of rate cuts, the Fed will need to shift its focus to a slowing labor market, rather than continuing to rely entirely on easing inflation to do all the heavy lifting, ” said de Chazal.
“Today’s report, and the subtle shift to a more balanced focus on slowing employment growth by the Fed, helps put the September rate cut firmly in place.”
Federal Reserve Chairman Jay Powell made it clear earlier this week that he is, in fact, paying more attention to a cooling jobs market.
“The latest labor market data sends a pretty clear signal that labor market conditions have cooled significantly compared to where they were two years ago,” he said during testimony before US lawmakers. “This is no longer an overheated economy.”
For too long, the Fed has been focused on the inflationary side of its mandate, keeping rates at a 23-year high in an effort to cool the economy.
But Powell says that with the labor market back to where it should be, the Fed is looking closely at both sides of its mission — stable prices and maximum employment.
The focus on the labor market comes after the release of an unemployment report for June that showed signs of a cooling soft labor market, with the jobless rate rising by a tenth of a percentage point for the second month in a row to 4.1%. .
While the unemployment rate of 4.1% is still historically low, it is up from 3.4% at the beginning of last year.
Powell also made clear this week that the central bank is actually getting closer to being comfortable about rate cuts, telling lawmakers that he was encouraged by evidence of cooler inflation and that more “good data” would help get the Fed where it wants to be. to become.
Inflation figures “have shown modest further progress” after some tepid readings in the first quarter, “and more good data would strengthen our belief that inflation is moving steadily towards 2%,” it said he in his testimony.
However, Powell did not say whether the cuts could begin in September. He also warned that he is not yet “prepared” to say that the central bank has enough confidence that inflation is returning to its 2% target.
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