Financial market participants await the release of the June inflation report in the US to position themselves for the Federal Reserve’s next decision. They were not disappointed as the CPI report showed that inflation in the US was lower than expected.
Inflation in the US has recorded twelve consecutive declines. While it was 9.1% from June 2022, it fell to 3.0% a year later.
However, inflation does not mean that inflation is under control. The economic definition states that the inflationary process is characterized by a slow rising rate of inflation.
But importantly, inflation is still rising. This is well above the 2% target feeder.
So, despite the pause in June and the encouraging inflation report released yesterday, the central bank is likely to raise funds rates in July.
Why will the central bank raise rates in July?
A further slowdown in inflation and the first jobs report in 15 years was not enough to prevent the central bank from raising rates in July. There are at least three reasons for the Fed to raise rates again.
First, conditions in the labor market have not deteriorated sharply. Despite the missed estimates in the jobs report, the labor market has been very strong this cycle.
Second, the housing market is resilient. For example, house prices were elastic and inventories were low.
Finally, financial conditions in the US improved and the Fed gave the green light for another rate hike.
Will this be the last rate hike of the cycle?
The central bank could do one more rate hike and ease. If it suggests that the final interest rate will be reached with a rate hike in July, the market will focus more on that than the actual rate hike.
Overall, expect some interesting market moves till the end of July. The central bank may want to be aggressive to further anchor inflation expectations.
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