US Inflation Down to 3%: What’s Happening in the Economy?
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US Inflation Rate Dropping Faster Than Expected
In a major economic turn of events, US inflation fell below forecast to 3% in June. This unexpected drop led investors to jump into action, betting on more interest rate cuts and sending the US dollar’s value plummeting. This welcome news has major implications for the Federal Reserve as they decide whether and how quickly to reduce interest rates, currently sitting at a 23-year high.
A Major Break: What’s Happening Now
In June, consumer prices soared to 3%, but compared to May’s 3.3% surge, it’s clear that US inflation is cooling. Bloomberg’s analysts also forecast a 3.1% annual hike, so the drop came in under expectations. Following this major shift, the US dollar dipped a staggering 0.8% compared to a basket of international currencies. A closer look at market movements tells a similar story:
- 2-year US Treasuries saw yields plummet, marking a 0.14 percentage point fall to a new, four-month low.
- The odds of at least two interest rate cuts in 2022 surged, climbing from 72 to 96%.
- S&P 500 futures transformed from the red to the black, even while keeping their relatively slight boost before the Wall Street opening.
Fed Focus on Softening Inflation Pressure
How did this inflation bombshell strike the Federal Reserve? Officials at the Feds are constantly seeking concrete signals of waning inflation pressures for them to make reliable interest-rate adjustments. According to Chairwoman Jay Powell, "this is . . .unambiguously good data.’ For the Fed to consider action, Powell requires continued solid financial figures. BNP’s senior US economist Andy Schneider explains that the current conditions suit precisely what the Fed demands:
"So far, this meeting was much like any previous [meeting’s data] — it comes across as largely encouraging about inflation’s overall situation!"
Interest Rates and What Does it Mean for the World Economy
Nowadays, while inflationary indicators hint they are receding, so-called ‘expert forecasts envisioned multiple rate-cut plans amid expectations for higher 2023 job numbers. It took Fed official Chair Jay Powell in June asserting their goal – that he wouldn’t just maintain to take any actions about reducing key borrowing costs! Meanwhile investors bet more to take that opportunity by dropping Treasury futures as rates decrease in coming days.
Author: www.ft.com
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