If you’re worried about the Federal Reserve, you got a mix of good news and bad news yesterday. Tamer-than-expected inflation data reduced the chance of a Fed hike this month...but didn’t move the needle much when it comes to hikes LATER in the year!
Take a look at MoneyShow Chart of the Day. It shows the implied likelihood of a Fed rate increase at the meeting that ends July 29, based on trading in the fed funds futures market. The chance of a 25-basis point hike (to a range of 3.75% - 4%) was hovering around 16% yesterday afternoon. That was down sharply from 41.7% a day earlier.
Source: CME FedWatch
The catalyst? We learned the Consumer Price Index (CPI) fell 0.4% in June, its first outright drop since the depths of the Covid pandemic in April 2020. After stripping out food and energy prices (to exclude the influence of the on-again/off-again war with Iran), “core” inflation came in flat. A weak reading on services inflation also provided some encouragement.
So, what’s the bad news? The risk of a hike before year-end is STILL elevated.
If you look at probabilities for the Fed meeting that ends Dec. 9, you see markets are pricing in a 41% chance the fed funds rate will be 25 bps higher then. That’s about where things stood both one week and one month ago.
Indeed, the new Fed Chairman Kevin Warsh testified before Congress yesterday that policymakers “have no tolerance for persistently elevated inflation.” Coupled with comments from other Fed speakers, that suggests a 2026 hike remains firmly on the table. So, don’t go breaking out the cheaper money confetti yet!
