By Ann Saphir and Howard Schneider
(Reuters) -The “last mile” of the US Federal Reserve’s battle against inflation may have shortened to a last lap after consumer prices fell in June, a long-awaited slowing of shelter cost increases took shape, and markets began pushing down yields on bonds and inflation-protected securities.
The consumer price index slid 0.1% last month after being unchanged in May, the Labor Department’s Bureau of Labor Statistics said on Thursday, and the year-over-year rise cooled to 3%, the lowest reading in a year.
Traders reacted swiftly, pricing in about an 90% chance of a September rate cut after the report, up from about 70% earlier, and also boosting bets on second rate cut in December. They also priced in an increasing, but still less than 50-50, chance that the Fed will squeeze in a third rate cut by year’s end.
“If we have another good inflation report in August, then I think we could see at least two rate cuts this year, possibly three,” said Peter Cardillo, chief market economist at Spartan Capital Securities.
The Fed next meets on July 30-31.
In two days of testimony before Congress this week Fed chair Jerome Powell appeared to edge the door open to a September rate cut, saying that the US economy was “no longer overheated,” and that “more good data” on inflation would lay the groundwork to reduce a benchmark policy interest rate that has been held in the 5.25% to 5.5% range for more than a year.
Fed officials consider that rate “restrictive” on the economy, and between the easing of price pressures and a still modest but steady rise in the unemployment rate they have begun actively considering rate cuts and becoming more concerned about slowing the economy too much.
June’s consumer price report may help solidify the case to begin easing policy, with a report Friday on producer prices another potential building block.
Powell speaks in public again on Monday at the Economic Club of Washington, a prominent platform to share how the latest round of inflation is being interpreted by the central bank.
There will be particular focus on what changes may be made in the Fed’s July policy statement, and whether officials have decided they no longer need to refer to inflation as “elevated.”
Before the next meeting the Fed will receive a report on the Personal Consumption Expenditures Price Index for June. The PCE index is used to set the Fed’s 2% inflation target and was last reported at 2.6%. A report on second quarter economic growth will also be released, with Fed officials generally expecting the economy to be growing near trend but slower than last year.
“Today’s data sets the Fed up for September-December rate cuts, with the groundwork being laid at the July 31 meeting,” said III chief economist Karim Basta.
(Reporting by Ann Saphir, Lucia Mutikani, Stephen Culp, Howard Schneider; Editing by Toby Chopra and Chizu Nomiyama)
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