Based on the recent Consumer Price Index (CPI) data for June 2024, experts are suggesting that the Federal Reserve may be moving closer to implementing interest rate cuts.
Chris Larkin, managing director at E-Trade from Morgan Stanley, believes that unless most economic figures revert to higher levels, the Fed's rationale for maintaining current rates may no longer hold. He indicates that a rate reduction could be possible as soon as September[3].
Seema Shah, chief global strategist at Principal Asset Management, expresses confidence that the minimal increase in core CPI since 2021 reassures the Fed that high CPI readings in the first quarter were temporary. She strongly believes this paves the way for multiple rate cuts this year, with a likely start in September[3].
Market reactions reflect these expert opinions, with traders in the fed funds market increasing their bets on a rate cut beginning in September. Current projections suggest an initial cut followed by at least one more by year-end[3].
The June CPI report shows inflation trending in the desired direction, with the all-items index rising 3.0% for the 12 months ending June, lower than the 3.3% increase for the 12 months ending May[3][4].
The 0.1% monthly increase in core CPI for June 2024 is significant for several reasons: Smallest increase since 2021: This represents the smallest monthly increase in core CPI since 2021, indicating a substantial slowdown in inflation.
- Below expectations: The 0.1% increase was lower than the forecasted 0.2%, suggesting that inflation is cooling faster than economists anticipated.
- Trend towards Fed's target: This modest increase shows that inflation is moving closer to the Federal Reserve's 2% target rate, though still remaining above it.
- Potential for rate cuts: The lower-than-expected core CPI increase strengthens the case for the Federal Reserve to consider interest rate cuts. Experts like Seema Shah from Principal Asset Management believe this paves the way for multiple rate cuts this year, possibly starting in September.
- Market reaction: The subdued core CPI figure led to a surge in stock market futures and a drop in Treasury yields, reflecting investor optimism about potential monetary policy easing.
- Broader economic impact: A lower core inflation rate could lead to increased real wages. The report showed a 0.4% monthly increase in real average hourly earnings for workers.
- Shift in inflation drivers: The report revealed a notable 1.5% drop in used vehicle prices, which were a significant contributor to the initial inflation surge in 2021. This decline suggests a reversal in some key inflationary pressures.
This 0.1% increase in core CPI is seen as a positive sign by economists and market analysts, indicating that inflationary pressures are easing and potentially setting the stage for a shift in monetary policy later this year.
Citations:
[1] https://www.bls.gov/news.release/cpi.nr0.htm
[2] https://www.bls.gov/news.release/pdf/cpi.pdf
[3] https://www.cnbc.com/2024/07/11/cpi-inflation-report-june-2024.html
[4] https://www.bls.gov/news.release/cpi.htm
[5] https://www.oecd.org/en/data/insights/statistical-releases/2024/07/consumer-prices-oecd-updated-9-july-2024.html
