What’s priced in for the Federal Reserve after the June CPI surprise

Federal Reserve Chairman Jerome Powell has repeatedly said that he’s looking for ‘greater confidence’ that inflation will sustainably fall to the Fed’s 2% target.

Headline inflation is still 3.0% but the past three month-over-month numbers were -0.1%, 0.0%, +0.3% — a trend that’s on track to hit the target. Moreover, the Fed has been noting that market-based measures of rents have been falling but that calculations in the inflation index badly lag. That should give them confidence that shelter inflation (which ran at +5.2% y/y in today’s report) will soon be a source of disinflation.

The market has now gained greater confidence that cuts are coming, with September now priced at 24 bps — or nearly fully priced in. By year-end, market pricing is for 59.5 bps — so two quarter point cuts and a 36% chance of a third.

For June of next year, 136 bps of easing is priced in from the current level of 5.25-5.50% (effective Fed funds at 5.329%).

This article was written by Adam Button at www.forexlive.com.