Federal Reserve officials signal weaker case for near-term rate hike after cooler U.S. inflation

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Fed signals rate pause

Highlights

Consumer Price Index rose 3.5% year-over-year in June, down from 4.2% in May, leading Fed officials to urge more data before policy changes.
Fed Chairman Kevin Warsh and Chicago Fed President Austan Goolsbee signal caution on near-term rate hikes, citing need for multiple benign inflation readings.
Financial markets cut July rate hike expectations to 15% after CPI report, with 65% odds priced in for a move in September.

Inflation data tempers July policy expectations

As reported by Reuters, top Federal Reserve officials say the latest Consumer Price Index data is encouraging but insufficient on its own to settle the outlook for interest rates.

Fed Chairman Kevin Warsh tells the U.S. House of Representatives Financial Services Committee that the CPI report is positive relative to expectations, but says he is not prepared to declare "mission accomplished." He says there is still plenty of work to do and that he would feel more confident with better data to guide policy decisions.

Warsh does not specify whether that work would mean another increase in the central bank's policy rate or a longer hold in the current 3.50% to 3.75% range. He says he will discuss with colleagues the extent and timing of any use of the Fed's monetary policy tools, while repeatedly stressing the central bank's commitment to price stability ahead of the July 28-29 meeting.

Chicago Fed President Austan Goolsbee also avoids drawing a direct policy conclusion from the June inflation report. Speaking to the Kenosha Area Business Alliance in Wisconsin, he calls the data surprisingly benign and encouraging, but says he would feel much better if several more months show similar results.

Markets cut hike bets as broader inflation picture develops

Consumer prices rise 3.5% in the 12 months through June, down from 4.2% in May, according to the data discussed by policymakers. A fuller June inflation picture is still pending, with the U.S. government set to publish the Producer Price Index on Wednesday.

That report is expected to help the Fed, analysts and investors estimate the June reading for the Personal Consumption Expenditures Price Index, the central bank's preferred inflation gauge. The PCE report is not released until after the next policy meeting, leaving officials to weigh incomplete information as they approach their decision.

Fed Governor Christopher Waller says on Monday, before the CPI release, that one cooler reading would carry limited weight and that he also wants to see several months of easing inflation. Unlike Warsh and Goolsbee, however, Waller makes clear that another hot inflation reading would call for a near-term response from the Fed.

Financial markets sharply reduce expectations for a rate increase after the CPI data. Investors now price in about a 15% chance of higher borrowing costs later in July and about a 65% chance of a move in September.

In our earlier article on the June U.S. CPI slowdown, we highlighted how a sharp monthly drop in headline inflation and a mild core reading prompted markets to scale back expectations for a near-term Federal Reserve rate hike. We also noted that regional price pressures and volatile components such as energy can keep the inflation outlook uneven, even as real earnings tick higher.

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