Falling consumer prices in the US in June might simplify the Fed's latest task in combating inflation. This unexpected decline in price pressure has strengthened policymakers' confidence that they are in control, potentially leading to lower interest rates in the coming months.
According to the Bureau of Labor Statistics, the Consumer Price Index decreased by 0.1% in June after stable indicators in May, marking the weakest monthly figure since May 2020. The annual growth was 3%, the lowest level in an hour.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, noted that the current path to 2% inflation looks encouraging, especially with the improving situation of stable inflation in the housing market.
Alberto Musalem, president of the Federal Reserve Bank of St. Louis, expressed cautious optimism, calling it "further progress" toward the Fed's 2% inflation target.
According to Mary Daly, president of the Federal Reserve Bank of San Francisco, the gradual decline in price pressures strengthens the case for lower interest rates, although the timing remains a matter of debate. She also emphasized that current data on employment, inflation, and economic growth might lead to policy adjustments.
At the Fed meeting on July 30-31, the key rate is expected to remain at 5.25%-5.5%; however, the conditions for reducing rates may be outlined in light of progress in reducing inflation. The next policy meeting is scheduled for mid-September.
Traders reacted to the data by increasing the probability of a rate cut in September to 90% and anticipating a second cut in November. Banks like JPMorgan and Macquarie have postponed their forecasts for rate reductions to September.
Some experts note that the "doves" have ample reason to lower rates after the July meeting, although the central bank may opt for a more gradual approach.
Jerome Powell, chair of the Fed, stated in Congress this week that the US economy is no longer overheated and that the improvement in inflation data may lead to a decrease in the base interest rate.
The slowdown in inflation in the housing market to 0.2% per month was a key event. Fed officials had anticipated this, but were waiting for confirmation before taking any particular action. Powell will speak at the Economic Club of Washington DC on Monday to discuss the interpretation of current Fed data.
Special attention will be on any changes in the wording of the Fed's July statement, potentially dropping the term "increased inflation." Before the July meeting, data on the Consumer Price Index for June, which is used to determine the Fed's inflation target and data on economic growth in the second quarter will be published.
Analysts note that today's data prepares the Fed to lower rates in September-December and that the foundation for this will be laid at the meeting on July 31.
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