Federal Reserve policymakers were looking for signs that inflation is returning to their 2% target on Thursday when a government report showed consumer prices unexpectedly fell in June. This indirectly strengthens the probability for an interest rate cut in September.
The consumer price index fell 0.1% last month after being unchanged in May, the Labor Department's Bureau of Labor Statistics reported on Thursday, and the annual increase slowed to 3%, the lowest reading in a year.
Traders reacted quickly, estimating around an 85% probability of a rate cut in September after the report, up from around 70% previously, and also raising expectations for a second rate cut in December. They also estimate an increasing probability, but still less than 50-50, that the Fed will make a third rate cut by the end of the year.
"If we get another good inflation report in August, then I think we could see at least two rate cuts this year or maybe three," said Peter Cardillo, chief market economist at Spartan Capital Securities.
Th Fed policymakers will meet next at the end of this month, and traders see less than a 10% chance of a rate cut by then. Fed Chairman Jerome Powell said on Tuesday that inflation data currently does not give him confidence to cut rates further, but that the central bank will do so when necessary.
