Fed Rate Path: From Cuts to Potential Hikes — Now Back to Cuts?
Key Questions
What does the weak June jobs data indicate about the labor market?
The June jobs report showed only 57k additions, a 720k drop in the labor force, and wage growth at 3.5%, signaling further weakening. Hospitality cuts and AI hiring mismatches were notable sector details. This reinforces the disinflation narrative and supports expectations for a September rate cut.
How are markets pricing the chances of a September Fed rate cut?
Markets are pricing in an 80% chance of a September cut following the soft jobs data. Commodity disinflation, including oil down 25% and 1-year breakevens at 1.43%, adds to this view. May PCE at 4.1% is seen as likely the peak.
What does the CIBC analysis say about AI inflation?
The CIBC analysis argues AI inflation may prove transitory by late 2027 but warns that interim effects could force rate hikes. This challenges the standard transitory narrative around AI-driven price pressures.
What do FOMC minutes preview suggest about Fed members' views?
The preview shows half of FOMC members expect a hike, even as data weakens. This highlights internal divisions on the rate path amid mixed inflation and growth signals.
How does the PPI data support the disinflation case?
PPI intermediate demand softened sharply in June, a rare sign of cooling pipeline inflation. This gives the Fed cover to cut rates while supporting the broader disinflation narrative.
What are the implications of housing starts reaching a six-year low?
Housing starts at a six-year low add to growth concerns and reinforce the case for monetary easing. Combined with weak labor data, it points to broader economic softening.
How does Fed Governor Waller view forward guidance?
Waller described forward guidance as a valuable tool that can speed the impact of monetary policy, though not useful at all moments. He also noted risks tilted toward high inflation.
What measurement changes are affecting inflation data?
Changes to the methodology for the Fed's preferred inflation measure are set to make the numbers look somewhat better. This could subtly assist the Fed's efforts to return inflation to 2%.
Weak June jobs data (57k, labor force drop 720k, wage growth 3.5%) further weakens labor market, reinforcing disinflation narrative. Sector details show hospitality cuts and AI hiring mismatch. Markets still pricing 80% chance of September cut. A new CIBC analysis argues AI inflation may be transitory by late 2027 but warns interim could force rate hikes, challenging the transitory narrative. FOMC minutes preview shows half of members expect a hike. Commodity disinflation (oil down 25%, 1-year breakevens at 1.43%) reinforces peak inflation view. May PCE at 4.1% likely peak. Housing starts at six-year low add growth concerns. New data: PPI intermediate demand softened sharply in June, a rare sign of cooling pipeline inflation, supporting disinflation narrative and giving Fed cover to cut.