Softer U.S. inflation figures cast doubt on Fed's rate hike plans

The latest U.S. inflation figures have raised doubts about the Federal Reserve’s intention to implement two 25 basis point (bps) rate hikes as indicated in its dot plot.

Both headline and core inflation have fallen short of estimates, with figures at 3.0% and 4.8% respectively. Additionally, the monthly core rate recorded its smallest increase since November 2022, standing at 0.2%.

This data suggests that the Fed might opt for just one final 25 bps rate increase at the July meeting, leading to speculations about the central bank concluding its tightening cycle. The market assigns an 88% probability of a rate hike at the July 25-26 meeting, bringing the fed funds rate to a range of 5.25% to 5.50%. However, there is only a 24% chance of another rate increase following that.

Given the uncertainty surrounding a potential second rate hike, there seems to be no relief in sight for the ongoing decline in the dollar index, which now trades at its lowest level since April 2022.

While it is important to note that this data covers only one month, if July’s inflation figures exhibit a similar outcome, it could significantly elevate the significance of Fed Chair Jerome Powell’s upcoming Jackson Hole speech. This speech might serve as a signal indicating the end of the Federal Reserve’s tightening cycle.