The new inflation data indicates that the Fed has probably finished its cycle of monetary tightening and rate hikes; He could even start cutting interest rates as early as next year, according to two well-known market experts.
The latest Consumer Price Index report showed that inflation was 3.2% year-on-year through July. Although that level is higher than the 3.0% increase in June, the figure was lower than economists' expectations of 3.3%.
Fundstrat's Tom Lee said in an interview with CNBC: I think the Fed is done with its long run in the tightening cycle. I think they will consider cuts early next year, he added.
Lee added: The Fed does not want to tighten interest rates (more)... If inflation goes down, they should cut interest rates otherwise it will constrain the economy more.
Chief economist Mohamed El-Erian made a similar view. And the Allianz advisor said in a post on Thursday on X: These numbers represent a relief to many who thought that the July data would reflect increases in energy and food, explaining that, in conjunction with the inflation data, the initial weekly jobless claims data of 248 thousand applications, will reinforce the already strong market view that The Fed will not raise interest rates in September, and it is also likely that the cuts will come after only a few months.
Over the past year, the Fed has sharply raised its benchmark lending costs, from levels near zero to more than 5 percent, about 500 basis points since early 2022.
The monetary tightening came in response to high inflation above 9% last summer, as the central bank aims to ease the inflation rate to its target of 2%.
Investors have been skeptical about the Fed's policy so far this year, concerned that any further rate hike could push the US economy into recession.
With the next monetary policy meeting in about a month, most traders are gearing up for another rate hike, according to CME FedWatch.
