U.S. inflation registered in at 3.0% year over year increase in June, a decrease of .3% from the month of May and was .1% below consensus. While the month over month Consumer Price Index increase came in at -.1%, this continues to keep rate cuts in play for the September meeting. Recent data on household consumption, construction spending and activity in the services sector have all come in below expectations.
Federal Reserve officials at the June policy meeting indicated that inflation is moving in the right direction after a sticky start to begin the year. They are pleased with the progress but continue to indicate that they need more confidence before they consider lowering the interest rates. Earlier this week Jerome Powell spoke before congress with an emphasis on the employment component of the Fed’s dual mandate. He confirmed that they are satisfied with the progress the economy has made, adding that decisions are made on a meeting by meeting basis, and understands that easing too late could weaken the economy and employment more than anticipated. Our view continues to be the Fed will be data dependent on policy, and if inflation were to continue to fall, it will increase the probability of a cut in the near term. The fed funds futures contract currently has a 75% probability of the first rate cut by September, and a second cut by December. The Fed’s dot plot is only calling for one rate cut this year and inflation would need to show stronger signs of descending in our view for the Fed to take a more aggressive view on easing so quickly.