Bond yields fell and equity markets rallied after the release. Following on the heels of last Friday's relatively soft labor report, the data suggests that the Fed is making progress toward its goal of cooling off the economy and bringing inflation under control.
The Fed's Beige Book verified these trends:
- "Overall economic activity increased slightly since late May...Overall economic expectations for the coming months generally continued to call for slow growth."
- "Employment increased modestly this period...Many Districts reported that labor availability had improved...Wages continued to rise, but more moderately. Contacts in multiple Districts reported that wage increases were returning to or nearing pre-pandemic levels."
- "Prices increased at a modest pace overall, and several Districts noted some slowing in the pace of increase...Price expectations were generally stable or lower over the next several months."
Given that inflation is still far above the Fed's target, we believe that they are likely to hike rates at the next FOMC meeting on 26 July. However, yesterday's releases should allow the Fed to deliver a less hawkish message. If core inflation continues to trend lower, this hike should be the last of the cycle.
Main contributor - Brian Rose
Original report - Cooling inflation takes pressure off of Fed, 12 July 2023.