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Inflation rates continued to ease in June, spurring traders in the fed funds futures market Thursday to boost the odds that the Federal Reserve will begin cutting interest rates at its September meeting.
The probability of a September rate cut of 25 basis points shot up to 87.9% from 69.7% Wednesday, according to the CME FedWatch tool. Odds were at 68.4% a week ago. Looking ahead to a potential December cut, the probability climbed to 51.7% from 33.8% a day earlier.
The odds soared after the June Consumer Price Index report showed the headline rate falling 0.1% on a month-over-month basis, the first such decline since May 2020. A decline in gasoline and used car prices contributed to the print that was expected to show an increase of 0.1%.
Y/Y, core CPI increased 3.3% and headline CPI eased to 3%, moving closer to the Fed’s 2% inflation goal. The inflation report arrived after Federal Reserve Chairman Jerome Powell finished two days of policy testimony on Capitol Hill.
“Today’s report is, to use Powell’s words, ‘good news’ and we now think this paves the way for a first cut in September (previously November), followed by quarterly cuts thereafter,” J.P. Morgan Chief U.S. Economist Michael Feroli said in a note Thursday.
“Given that Powell has also said the decision to make the first cut will be ‘consequential’ why shouldn’t we expect cuts at every meeting thereafter? We certainly think that’s an underappreciated risk, particularly if the labor market cools further,” Feroli said.
Last month, Feroli changed his rate-cut call to November from July after the U.S. May payrolls number came in hotter than widely expected.
The Fed will hold its next meeting on Sept. 17-18.
Stocks (SP500)(COMP:IND)(DJI) during Thursday trade sought a firm direction and Treasury yields (US2Y)(US10Y) fell after the June CPI report. The Nasdaq Composite and S&P 500 closed at record highs on Wednesday.