Cooling US inflation points to the Fed holding steady
The desk believes that recent cooling in US inflation, particularly following a disappointing July jobs report, will likely lead to the Federal Reserve maintaining its current interest rate policy for an extended period. Per the full note source, July saw core inflation decline to an annualized rate of 2.5%, with 3M annualized core inflation dipping even lower to 1.6%. This shift reduces the urgency for hawkish moves from the Fed, especially as market participants brace for upcoming data releases and the Jackson Hole symposium later this month.
What the desk is arguing
The desk interprets the latest inflation data as a strong signal that the Federal Reserve may pause any further rate hikes, affirming a shift in market sentiment. Following July's benign inflation report, which revealed core inflation steady at 2.5% versus 2.6% in the prior month, expectations for tightening have considerably eased.
With monthly core CPI rising only 0.2% and headline inflation increasing by 0.1%, this ongoing trend of disinflation keeps the Fed's rate hike trajectory in check. Analysts now anticipate that the inflation environment, particularly with subdued gasoline and shelter prices, suggests a prolonged hold on rates, especially in light of another jobs report and inflation print due before the FOMC meeting on September 16.
Where it sits in our coverage
Our consensus target for USD/EUR is currently set at 1.075, bounded by a range of 1.04 to 1.12. Specific firm forecasts include: - JPMorgan: 1.10 (Mar26) - BofA: 1.04 (Mar26)
Given the current outlook, the desk's call aligns closely with the lower end of the spectrum but is more optimistic compared to BofA's bearish stance.
How other firms see it
Firms such as JPMorgan and others are aligned in their expectations for Fed policy to remain dovish, reflecting a consensus view pointing toward sustained rates. Conversely, BofA presents a contrary stance, suggesting a potential for earlier rate hikes than the market expects.
As inflation and employment reports continue to unfold, positive trends in USD may reveal more about broader market positioning, particularly in regards to US Treasury yields and the carry trade dynamics in the FX space.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Cooling inflation data reduces pressure on the Fed for immediate rate hikes.
- 02Core inflation registers at 2.5%, signaling a softer economic backdrop.
- 03Market expectations are adjusting, with significant upcoming employment and inflation data on the horizon.
- 04The upcoming Jackson Hole symposium may further steer market sentiment regarding Fed actions.
Market implications
Traders should closely monitor the USD/EUR pair around the 1.07 level, as any significant deviations in upcoming inflation or jobs data could provoke volatility. The Jackson Hole symposium is anticipated to serve as a critical directional cue for Fed policy expectations leading into the September FOMC meeting.
Risks to this view
A reversal of this outlook could arise from any unexpected rebound in inflation beyond current estimates or markedly strong jobs data in the next report. Such developments would potentially necessitate a more aggressive Fed response, altering market dynamics significantly.
Articles Cooling US inflation points to the Fed holding steady Published 14:25 United States Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Another benign inflation report following hot on the heels of a poor July jobs report has seen markets increasingly doubt the resolve of Fed hawks to deliver rate hikes this year. We see four key reasons for the disinflation trends to continue and expect the Fed to hold rates steady for a prolonged period James Knightley Low July inflation at the core and headline levels indicate the Federal Reserve may keep rates on hold for a prolonged period 2.5% Annual rate of core inflation Inflation continues to cool US consumer price inflation has come in as expected in July. After a remarkably benign June report, headline prices rose 0.1% month-on-month in July while core CPI (ex-food and energy) rose 0.2% MoM.
This brings the year-on-year rate of inflation down to 3.4% from 3.5% for headline while core inflation is now running at 2.5% versus 2.6% previously. In terms of 3M annualised core inflation, we are now down to just 1.6%, which, after the poor jobs report last Friday, should leave the Fed hawks less confident on the need for a rate hike, but we do have another job and inflation print plus the annual Jackson Hole symposium before the next FOMC meeting on 16 September. This will limit the scope for significant market reaction today.
In terms of the details, gasoline prices fell 2.9% MoM while shelter was subdued at just 0.1% MoM with food (+0.1%), apparel (+0.1%) and new vehicles (+0.1%) and other goods & services (+0.1%) all very well-behaved. Used cars and trucks (+0.4%) and medical care (+0.4%) and education (+0.6%) were the main areas of elevated price pressures, but all experienced falls in June and the underlying story looks OK. The main issue remains airline fares (+2.2% MoM/ 25.5% YoY), which mainly reflects higher jet fuel.
That can quickly correct lower on a deal in the Middle East. Overall, nothing here to change our view that the Fed is set for a prolonged pause well into 2027. The chart below shows core CPI under different metrics.
The black line represents 0.17% MoM, which is what we need the blue bars to average to bring the YoY rate to 2% over time. Core inflation metrics Source: Macrobond, ING "> Source: Macrobond, ING Four reasons for inflation to slow into 2027 Gasoline can continue to contribute to lower headline inflation – remember that the current oil price of around $83/bbbl is historically consistent with US retail gasoline prices of $3.80/gallon – below the current AAA measured average US price of $4 given refining margins have widened a touch. As such, if we get a deal to reopen the Strait of Hormuz and flow resumes, we should see margins compress, which will deliver lower gasoline costs.
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