The most reassuring inflation data since the US Federal Reserve began its battle against inflation through higher interest rates in March 2022 has lifted the odds of the central bank cutting rates as many as three times before the end of 2024.
The consumer price index increased just 3% from June 2023 to June 2024, the US Bureau of Labor Statistics reported July 11. That is the lowest annual increase in the market's preferred inflation measure since March 2021 and a significant drop from June 2022, when annual growth peaked at about 9%. On a monthly basis, prices fell 0.1% from May.
Inflation now appears firmly on track toward the Fed's 2% target. While the latest data is not enough for Fed officials to seriously consider a cut at their next meeting at the end of July, it may be enough to justify cuts at the September, November and December meetings, economists said.
"This report doesn't solidify the case for three rates by year-end, but it will likely increase the odds of that scenario playing out," said Bret Kenwell, a US investment analyst at eToro. "The inflation trend is moving in the right direction and when combined with the recent softness in the labor market, it justifies a rate cut from the Fed."
On track to target
The odds of at least three rate cuts of 25 basis points each by the end of 2024 was at nearly 50% on July 11, up from about 15% a month earlier, according to the CME FedWatch Tool, which measures investor sentiment in the fed funds futures market.
The Fed, which lowered its benchmark federal funds rate to near zero in response to the pandemic, raised rates by a total of 525 basis points during 11 meetings from March 2022 to July 2023. It has held rates steady over the past year, as the economy has averted a recession, inflation has proven stickier than anticipated and the labor market has remained resilient.
Inflation data is now on track to reach the Fed's 2% target in late 2025 and with more evidence of a cooling job market and decelerating consumer spending growth, a rate cut in September now looks nearly certain, said James Knightley, chief international economist with ING.
Fed Chairman Jerome Powell may use the central bank's annual conference in August to explicitly signal that more interest rate cuts are coming, Knightley said.
Little need to cut twice
Still, after cutting once in September, the Fed may feel little need to cut again before the end of the year with unemployment remaining relatively low, at about 4%, and the number of job openings still outpacing the number of job seekers, said David Russell, global head of market strategy at TradeStation.
"The Fed probably won't feel a need to cut three times because the employment data hasn't broken into recession territory yet," Russell said. "Such aggressive easing could even spook markets."
In addition, the Fed may be reluctant to cut again in November and December due to US elections. If former President Donald Trump wins in November, he is expected to push forward policies that could increase inflation, including tariff hikes, tax cuts, and a crackdown on immigration, which could reheat the job market, said Stephen Pavlick, head of policy at Renaissance Macro Research.
"Why cut more when you're likely going to have to raise [rates] again?" Pavlick said.