The Federal Reserve’s journey to combat inflation may now be approaching its final stages after U.S. consumer prices unexpectedly declined in June. This development has bolstered policymakers’ confidence in their progress and opened the door to potential interest rate cuts in the near future.
According to the Labor Department’s Bureau of Labor Statistics, the consumer price index fell by 0.1% in June, following no change in May. This marks the weakest monthly reading since May 2020, with a 3% year-over-year increase, the lowest in a year. Over the past three months, consumer prices have risen at an annual rate of just 1%.
One Fed official praised the latest inflation data, describing it as “excellent” and highlighting significant improvements in housing inflation. Another offered a more cautious endorsement, noting “encouraging further progress” toward the Fed’s 2% inflation target.
Another official expressed that the easing price pressures support the case for lower interest rates, although the timing remains uncertain. They emphasized that current data, including employment, inflation, growth, and economic outlook, suggest some policy adjustments may soon be necessary.
At the upcoming July 30-31 meeting, policymakers are expected to maintain the policy rate at 5.25%-5.5%, but may set the stage for rate cuts in response to continued progress in reducing inflation. Traders have responded quickly to the latest data, now anticipating a 90% chance of a rate cut in September and increased likelihood of additional cuts by year-end.
Major financial institutions such as JPMorgan and Macquarie have adjusted their expectations, predicting an initial rate cut in September. One economic research expert noted that while a July rate cut might be too sudden, strong signals for a September cut are likely.
In recent Congressional testimony, the Fed Chair indicated a potential openness to a September rate cut, citing the U.S. economy’s current state as “no longer overheated” and suggesting that further positive inflation data could justify lowering the benchmark interest rate.
June’s consumer price report and an upcoming producer price report may further solidify the case for policy easing. The slowing of shelter inflation, in particular, has been a critical development, as Fed officials have awaited concrete data before making decisions.
The Fed Chair is scheduled to speak again on Monday at the Economic Club of Washington, providing another opportunity to interpret the latest inflation data. Additional speeches by Fed officials are expected next week before the July 20 communication blackout ahead of the policy meeting.
Key data releases, including the Personal Consumption Expenditures Price Index for June and the first estimate of second-quarter economic growth, will be closely watched as they will inform the Fed’s decisions. Experts suggest that the groundwork for rate cuts between September and December is being laid, with significant developments expected at the July 31 meeting.
