Will The Fed Pause In September? 5 Economists Break Down The Signals From Falling Inflation In June

U.S. consumer price inflation fell from 4% to 3% year-on-year in June, slightly below the expected 3.1%, marking the twelfth consecutive decline in inflation and the lowest print since March 2021.

In a surprising turn, the U.S. core inflation rate, excluding food and energy, dropped to 4.8%, down 0.5 percentage points from May and below the expected 5%.

These figures have sparked speculation among investors regarding a stronger possibility of only one additional rate hike ahead by the Federal Reserve.

The U.S. dollar plummeted to the lowest level since April 2022, with the Invesco DB USD Index Bullish Fund ETF UUP down 0.9%.

The stock market rallied, with the SPDR S&P 500 ETF Trust SPY up 1.1% and the Invesco QQQ Trust QQQ up 1.6%.

Chart: US Inflation Rate Tumbles To Lowest Level Since March 2021

Five economists shared their perspective on the June CPI report and their outlook on U.S. interest rates:

1. Chris Zaccarelli, chief investment officer for Independent Advisor Alliance: Zaccarelli sees the June CPI report as a positive surprise. The expert said that while the rate hike for this month is likely, the report strengthens the arguments of doves within the Fed who may push for a pause in September and potentially halt rate hikes for the year. Zaccarelli notes the surprising resilience of the economy thanks to the consumer’s strength, suggesting the aggressive rate hike cycle may not immediately lead to a recession. Yet he also mentions the uncertainty surrounding future meetings and the possibility of the next recession being pushed further into the future.
   
2. Jeffrey Roach, chief economist for LPL Financial: Roach views the deceleration in core inflation as encouraging news for investors, leading to a drop in Treasury yields. He supports the idea that bond yields will likely be lower by the end of the year.
   
3. Joseph Brusuelas, principal and chief economist at RSM US LLP: Brusuelas anticipates a battle over the September meeting based on the easing of inflation in the coming months. He acknowledges the challenges the Fed faces in communication and policy. With inflation easing, Brusuelas forecasts a topline inflation average of 3% in the current quarter and 2.8% in the final quarter of the year. He believes that one more rate hike and an acceleration in drawing down the Fed’s balance sheet may be necessary to push longer-term rates higher.
   
4. Oliver Rust, head of product at Truflation: Rust highlights the positive implications of the significant decline in inflation. Sectors such as utilities, fuel oil, and used cars and trucks have contributed to this decrease. The proximity of current inflation levels to the Federal Reserve’s long-term target of 2% suggests a potential signal for the Fed to halt interest rate hikes.
   However, Rust suggests the Fed may proceed with one 25-basis-point hike this month and review again in September, considering a robust labor market and sustained consumer spending.
   
5. Peter Essele, head of portfolio management for Commonwealth Financial Network: Essele points out that lower inflation indicates reduced pressure on consumers at gas stations and grocery stores, leading to increased disposable income. This surge in purchasing power is likely to translate into a GDP upswing in the second half of 2023, he said.

Read now: Investor Optimism Improves Ahead Of Inflation Data

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