Fed July hike odds fall after cooler June CPI despite Waller warning
Softer June U.S. inflation cut market-implied odds of a near-term Federal Reserve rate hike, pressured the dollar and steadied some Asian currencies, even as Christopher Waller said more tightening could still be needed.
Traders sharply reduced expectations for a Federal Reserve rate increase after June U.S. inflation came in cooler than expected. Headline CPI slowed to 3.5% year on year from 4.2% in May, while core CPI eased to 2.6% from 2.9% and was unchanged on the month. Fed funds futures and other market gauges showed July hike odds falling from roughly 35%-45% before the data to about 10%-18% afterward, while September hike odds also declined. The softer reading weakened the dollar, supported some Asian currencies, and led some analysts, including SignatureFD's Tony Welch and CBA's Samara Hammoud, to say markets had unwound expectations for near-term tightening. At the same time, Fed Governor Christopher Waller said a near-term hike remained possible if underlying inflation stayed hot and that he would need several months of cooler readings to be comfortable not raising rates at all. Higher oil prices tied to renewed U.S.-Iran tensions remained a risk to the inflation outlook.
- core CPI: Consumer Price Index excluding food and energy, used to gauge underlying inflation pressures.
- Fed funds futures: Derivatives tied to expected U.S. policy rates that markets use to infer the likely path of Federal Reserve decisions.
- Federal Open Market Committee: The Federal Reserve body that sets U.S. monetary policy, including interest-rate decisions.