Top Federal Reserve officials welcomed fresh data showing US consumer price inflation cooled in June but stressed that policymakers would need several more months of similar readings before gaining confidence that inflation is on a sustained downward path, according to Reuters.
The comments from Federal Reserve Chair Kevin Warsh and Chicago Fed President Austan Goolsbee indicate that while the case for a near-term interest rate hike has weakened, policymakers are not yet ready to conclude that inflation risks have faded.
Speaking during testimony before the US House Financial Services Committee, Warsh described the latest Consumer Price Index (CPI) report as encouraging relative to expectations but cautioned against placing too much emphasis on a single month's data. He said that the central bank still has significant work to do and that policymakers would be more confident if additional data confirmed that inflation was easing.
Warsh did not indicate whether the remaining work on inflation would ultimately require another interest rate increase or simply a prolonged pause, maintaining the Federal Reserve's current stance of avoiding explicit forward guidance on future policy decisions.
According to Reuters, Warsh also said Federal Reserve officials would continue debating the timing and extent of any future use of monetary policy tools, while reiterating the central bank's commitment to restoring price stability. The Federal Reserve's next policy meeting is scheduled for July 28-29.
Chicago Fed President Austan Goolsbee struck a similarly cautious tone despite welcoming the inflation report. Reuters reported that Goolsbee described the June CPI data as surprisingly benign and encouraging but said one month's improvement was insufficient to conclude that inflation was moving sustainably toward the Fed's target.
US consumer prices rose 3.5% in the 12 months through June, down from 4.2% in May, marking a notable moderation in inflationary pressures, Reuters reported.
Focus shifts to producer prices
Market attention is now turning to the June Producer Price Index (PPI), due for release on Wednesday, which will provide a broader picture of inflation trends.
According to Reuters, the PPI data will help economists estimate the June reading of the Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's preferred inflation gauge, even though the official PCE report will only be released after the July policy meeting.
Earlier this week, Federal Reserve Governor Christopher Waller had also cautioned against reading too much into a single softer inflation report. Reuters reported that Waller said several months of easing price pressures would be needed before concluding inflation was firmly on track toward the Fed's 2% objective.
Unlike Warsh and Goolsbee, however, Waller has been more explicit about the policy implications, indicating that another unexpectedly strong inflation reading could warrant a near-term policy response, Reuters reported.
Markets trim rate hike expectations
Following the softer-than-expected CPI report, financial markets significantly reduced expectations of an imminent rate increase.
According to Reuters, investors now see only about a 15% probability of a rate hike at the Federal Reserve's July meeting, while the odds of an increase at the September meeting stand at roughly 65%, reflecting growing confidence that inflation may be easing even as policymakers remain cautious.
