US rate cut bets heat up, but inflation reacceleration jitters to keep Fed wary

Investing.com -- Bets on Federal Reserve September rate cut were given a major boost this week following a steeper-than-expected slowdown in inflation last month, but RBC continues to believe that a cut may only come at the end of the year as the reacceleration in inflation seen in Q1 will likely continue to weigh on the Fed's thinking. 

 Earlier the week, the latest reading on consumer price index showed price pressures slowed more than expected in May, but "one data point doesn’t make a trend," RBC said Thursday. "[W]e continue to think the inflation reacceleration scare earlier this year will be enough to keep the Fed from cutting rates until later in December," it added The call for a one hike this year is in-line with the Fed's latest thinking after the central bank at its June meeting, earlier this week, signaled just one cut, down from a prior estimate of three cuts.  Others agree and point to the fewer rate cut outlook as a sign that stronger inflation at the start of the year will continue to filter into the Fed's monetary policy calculus.   "Chair Powell’s measured tone on inflation, and the 'less dovish' new dot plot indicate that the pickup in inflation in Q1 significantly dented the Fed’s confidence in its benign inflation outlook," MRB Partners said in a recent note. Remarks from Fed officials following the Fed's Wednesday announcement continued to carry a sense of cautious against cutting rates too early.  

“”We’re not there yet, but you have to look at the whole group of data and be happy that we’re starting to see inflation move back down again after stalling a bit in the first part of the year,” Cleveland Federal Reserve Loretta Mester said in an interview with CNBC.

Chicago Fed President echoed these remarks, saying "more months like we just saw on inflation" could lead to the Fed cutting rates.  

Fed-funds futures traders now see a 61.4% chance of the first rate cut in September, up from 45% in the prior week, and see a 72% chance of at least two rate cuts by the end of the year, according to Investing.com's Fed Rate Monitor Tool.