The Federal Reserve is now less likely to raise interest rates this month after new data showed inflation cooled more than expected in June.
The U.S. Bureau of Labor Statistics reported the Consumer Price Index rose 3.5% over the past year through June, down from a 4.2% annual increase in May. While inflation remains above the Fed’s 2% target, the pace of price increases is moderating.
Core inflation drops, easing pressure on the Fed
The core CPI, which excludes food and energy prices, rose 2.6% year over year in June, a decline from 2.9% in May. On a monthly basis, core inflation held steady, suggesting underlying price pressures may be easing.
Economists consider core inflation a better indicator of long-term trends. The figures show inflation isn’t yet under control, but the pace of increases is cooling.
Markets reacted quickly. Before the report, traders had priced in a 35% chance of a quarter-point rate hike at the Fed’s July 28-29 meeting. After the data, that probability fell to about 10%. Expectations for September also softened, with investors now seeing a 60% chance of a hike, down from over 90%.
Energy prices add uncertainty
The report arrives as energy markets remain volatile. Oil prices dipped in June amid diplomatic efforts between the U.S. and Iran, but prices have climbed again in recent days after renewed hostilities around the Strait of Hormuz, one of the world’s most strategically important shipping routes. Before the conflict that erupted earlier this year, roughly one-fifth of the world’s crude oil supply moved through the waterway.
Related: Oil rises after Hormuz Strait incident
Federal Reserve Governor Christopher Waller said Monday that if price pressures remain strong, policymakers may still need to raise rates. He indicated several months of cooler core inflation would be needed before ruling out further hikes. While his remarks reflect personal views, investors often treat them as a signal of the Fed’s direction.
The Fed has spent the past two years trying to control inflation without causing a recession. The latest data shows progress, but the path forward remains uncertain. Consumer demand remains strong, and business investment in artificial intelligence is driving new spending.
Federal Reserve Chairman Kevin Warsh is scheduled to begin two days of testimony before Congress. In prepared remarks for the House Financial Services Committee, Warsh emphasizes the central bank’s “no tolerance” for persistently raised inflation, reinforcing its commitment to price stability even as recent data point to improvement.
Some economists believe the Fed isn’t done tightening. Analysts at Capital Economics argued the latest report may only delay a rate hike, not prevent one. They wrote that strong business investment and resilient consumer demand could keep core inflation above the Fed’s target in the months ahead.
The Fed’s next move will depend on whether the cooling trend continues. Markets are betting on a pause, but the central bank’s messaging in the weeks ahead will be closely watched.
