Chances Of Another 0.75% Interest Rate Hike Plummet Following Soft CPI Inflation Reading

The U.S. Federal Reserve raised its target Fed funds rate by 0.75% in June and July in an attempt to get inflation under control.

Investors wondering if the Fed will pull the trigger on a third 0.75% hike at its next meeting in September got some key inflation data on Wednesday morning suggesting the Fed may dial back the pace of its tightening.

The Labor Department reported the consumer price index (CPI) gained 8.5% in June, down from a 9.1% increase in July. In response to the cooler inflation number, the bond market is now pricing in a 37.5% chance of another 0.75% rate hike in September, according to CME Group. Just 24 hours ago, the market was pricing in a 68% chance of a 0.75% rate hike.

Related Link: CPI Inflation Slows To 8.5% In July, Stocks Rip Higher — But Are Wages Keeping Up?

Jamie Cox, managing partner at Harris Financial Group, said inflation likely peaked months ago and is finally showing up in the headline data in a meaningful way.

"The Fed now has plenty of cover to reduce the pace and size of future rate hikes. This is really good news and decreases the odds of stagflations and the need for a big recession to break the back of embedded inflation," Cox said.

Related Link: Bombshell Jobs Report: All Pandemic Jobs Lost Restored, Flipping Recession Script And Fueling Inflation, Fed Fears

More Rate Hikes Coming: While the chances of another 0.75% rate hike have fallen, the market is still pricing in a 100% chance of at least a 0.5% rate hike in September. Investors are also expecting interest rates to continue to rise through the end of the year.

The market is now pricing in a 46.3% chance the fed funds target rate range will be 3.5% to 3.75% or higher by the end of 2022. Only 24 hours ago, those chances were 74.1%.

Brian Price, head of investment management for Commonwealth Financial Network, said Wednesday the market is now anticipating inflation will continue to fall throughout the second half of the year.

"It looks like the odds of another 75 basis point hike by the Fed have dipped significantly in the wake of this report and we could only see a 50 basis point hike at the next meeting," Price said. "If energy prices continue to fall, then I expect that we’ll see inflationary data coming down in future months."

Benzinga’s Take: Falling inflation rates are certainly good news, but interest rates will most certainly continue to rise until inflation falls back down near the Fed's long-term target rate of 2%.

Wednesday's bullish action in the SPDR S&P 500 ETF Trust SPY is a knee-jerk relief rally, but it may still be challenging for the S&P 500 to make new all-time highs anytime soon.

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