Inflation Crushes Hopes That Federal Reserve Will Cut Interest Rates in July
Key Takeaways
- Inflation rose in June, moving further from the Federal Reserve’s goal of 2% each year.
- This flare of inflation will likely discourage the Fed from cutting its influential interest rate later this month.
- Economists and investors are still hopeful that the central bank will cut its interest rate at the following meeting in September.
An uptick in inflation quashed investors’ hopes that the Federal Reserve would reduce its influential interest rate when the central bank’s policy committee next meets.
Inflation rose in June, up 2.7% year-over-year, according to a report released Tuesday morning by the Bureau of Labor Statistics. That’s far higher than the Fed’s goal of 2% inflation each year.
Flaring inflation could make it harder for the Fed to cut its influential federal funds rate. Higher interest rates are designed to stifle inflation and slow the economy by increasing interest rates on all kinds of loans.
“The heating up of inflation in June, while close to expectations, is a step in the wrong direction that will keep the Federal Reserve on the sidelines at the upcoming July FOMC meeting,” wrote Scott Anderson, BMO Capital Markets’ chief U.S. economist.
After the report was released, the chances of a July 30 rate cut fell to 2.6% from an already slim 6.2% the previous day, according to the CME Group’s FedWatch tool. The tool forecasts rate movements based on fed funds futures trading data.
The Fed has been holding its interest rate at a higher-than-usual level since January, keeping upward pressure on borrowing costs for all kinds of loans. Fed officials have been reluctant to cut interest rates out of concern that tariffs will reignite the high inflation that took hold after the pandemic.
Tuesday’s report showed signs of tariffs pushing up prices, economists said. However, some central bankers and economists suggest that tariff-related inflation could be temporary.
“We still expect the FOMC to begin cutting rates at its September meeting. The gradual softening in the labor market that is ongoing suggests monetary policy is still restrictive, and if tariffs remain near current levels (admittedly a major ‘if’ in today’s policy environment), then we think the worst-case scenarios around the inflation outlook are increasingly unlikely,” a group of economists at Wells Fargo Securities wrote in a commentary.