Top Federal Reserve officials on Tuesday embraced a softer-than-expected consumer price inflation reading for June but made clear they would need further evidence of sustained disinflation before drawing any firm conclusions about the path of interest rates, according to Reuters. The Consumer Price Index rose 3.5% on a year-on-year basis in June, a notable deceleration from the 4.2% recorded in May. The reading came in better than market expectations, offering a moment of cautious optimism for policymakers who have been navigating a prolonged inflation battle.
Fed Chairman Kevin Warsh, testifying before the U.S. House of Representatives Financial Services Committee, acknowledged the positive signal from the data but resisted any triumphalist interpretation. "While I reviewed the data that came out this morning on CPI, and it was positive relative to expectations, I'm not for cherry-picking; I'm not going to show up here and say 'mission accomplished'," Warsh said.
He added that there is "plenty of work to do" and expressed a preference for more robust data to guide the central bank's decision-making. Warsh, consistent with his broader stance against forward guidance on the Fed's rate trajectory, declined to specify whether the remaining work he envisions would involve raising the central bank's policy rate, currently held in the 3.50%-3.75% range, or simply maintaining it at that level for an extended period. He indicated that internal deliberations would focus on "the extent and timing" of deploying monetary policy tools in the period ahead.
Chicago Fed President Austan Goolsbee echoed a similarly cautious tone, describing the June CPI report as "surprisingly benign" and "encouraging" but stopping well short of signaling imminent policy action. Speaking to the Kenosha Area Business Alliance in Kenosha, Wisconsin, Goolsbee said he would be "feeling a lot better" if several more months of comparable inflation readings materialised. "I'm heartened by this CPI today, but we need a lot more than one month to think that it is going well," he told the audience.
Neither Warsh nor Goolsbee directly addressed the implications of Tuesday's data for the Fed's upcoming rate decision at the July 28-29 policy meeting. Fed Governor Christopher Waller, who spoke on Monday ahead of the CPI release, took a more explicit position. Waller stated he would draw little comfort from a single cooler month of inflation data and, like Goolsbee, said he would need several months of easing price pressures to be confident inflation was returning to the Fed's 2% target.
Crucially, Waller was unambiguous about the policy implications of an adverse scenario, warning that another hot inflation reading would require a "near-term" response from the Fed. "You want the markets to have as much information as possible," Waller said. "Surprising people is not a good idea." Financial markets responded decisively to Tuesday's data.
Rate-hike bets were sharply pared back, with market pricing reflecting approximately a 15% probability of a rate increase at the July meeting and around a 65% chance of a hike in September, according to Reuters. A more complete picture of June inflation dynamics will come into focus on Wednesday, when the government is scheduled to release the Producer Price Index, a measure of wholesale price pressures. That data, combined with Tuesday's CPI report, will allow the Fed, financial analysts and investors to construct an estimate of the June Personal Consumption Expenditures Price Index, the central bank's preferred inflation gauge.
The official PCE release is not expected until after the conclusion of the July policy meeting. Reporting by Ann Saphir, Reuters. Editing by Paul Simao.
Source: reuters.com