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The latest sign that inflation is cooling makes it more likely the Federal Reserve will be able to gain enough confidence to cut interest rates this fall.
The odds of a cut in September jumped Thursday after 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’s meeting on Sept. 17-18.
“I think it puts September firmly on pace for a cut,” Peter Tchir, Academy Securities macro strategy head, told Yahoo Finance.
Some Fed watchers even think that a cut at the Fed’s July 30-31 meeting is now a possibility if some other pieces fall into place.
“The Fed could very well lower rates sooner than September if the labor market softens at a faster clip,” said Quincy Krosby, chief global strategist for LPL Financial.
The Consumer Price Index on a “core” basis — which excludes volatile food and energy prices the Fed can’t control — rose 3.3% year over year in the month of June. That was a tenth of a percent below expectations and below the level seen in May.
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Month-over-month core CPI was also encouraging, rising 0.1% after increasing 0.2% in May.
The “muted” month-over-month increase “strengthens the case for a September rate cut,” said Paul Ashworth, chief economist for Capital Economics.
A lot, however, still depends on the next reading of the Fed’s preferred inflation gauge — the “core” Personal Consumption Expenditures index (PCE) — as well as further cooling of the jobs market, Ashworth added.
San Francisco Fed president Mary Daly didn’t commit to any specific timing on rate cuts in a conversation with reporters Thursday following the CPI release except to say that the time is “closer than six months ago.”
“With the information we have received today, which includes data on employment, inflation, GDP growth and the outlook for the economy, I see it as likely that some policy adjustments will be warranted,” Daly said.
Inflation will continue to come down gradually, she added, but “when exactly that happens and when it would be appropriate to make an adjustment of policy is still unclear.” She said she still needs to see more information.
Another central bank policymaker, St. Louis Fed president Alberto Musalem, said Thursday that the new CPI number “points to encouraging further progress towards lower inflation” but that “I will be looking for more evidence that inflation can be expected to converge to 2% going forward.”
Richard de Chazal, macro analyst for William Blair, said the fact that June marks the third consecutive month of more moderate inflation growth helps “confirm that inflation is firmly back on a downward trajectory.”
