The monthly inflation rate fell for the first time in more than four years, according to the June Consumer Price Index (CPI) report. Now mortgage professionals and traders are placing their bets on the Federal Reserve’s response, with many hoping it's enough to lower interest rates in September.
June CPI declined 0.1% from May, putting the 12-month rate at 3%. That’s the lowest level in more than three years, the Labor Department reported Thursday, and the first time since May 2020 that the monthly rate showed a decrease.
Housing-related costs have been one of the most stubborn components of inflation, the report noted, and make up about one-third of the weighting in the CPI. However, a pullback in the rate of increase is a positive sign.
Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, believes it means the Fed is “one step closer to a September rate cut." “A lot can happen between now and September 18, but unless most of the numbers pivot back into ‘hot’ territory, the Fed’s reasoning for not cutting rates may no longer be justified,” Larkin said.
While Fed policymakers target inflation at 2% annually, the June CPI report provides further ammunition that the trend in prices is headed in the right direction.
The CPI peaked above 9% in June 2022, prompting the Fed to respond with a series of interest rate hikes that concluded in July 2023. Since then, the central bank has held its benchmark borrowing rate in a range between 5.25% to 5.50%, even as inflation has fallen sharply over the past few years.
Following the report, traders in the fed funds futures market increased their bets that the central bank would lower rates starting in September.
“The latest inflation numbers put us firmly on the path for a September Fed rate cut,” said Seema Shah, chief global strategist at Principal Asset Management. “The smallest gain in core CPI since 2021 surely gives the Fed confidence that Q1′s hot CPI readings were a bump in the road and builds momentum for multiple rate cuts this year.”
However, Redfin lead economist Chen Zhao more boldly expects rate cuts to come even sooner.
"With a labor market that is slowing meaningfully, it almost doesn’t make sense to wait until September to make the first cut," Zhao said. "The Fed could – and perhaps should – cut at its meeting on July 31. The reason why it is likely to wait is that post-financial crisis, the Fed prefers to give markets ample time to price in changes to monetary policy and they likely don’t feel they have enough time to gradually change their language and set expectations before July 31."
