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Key Inflation Report Expected to Influence Fed Rate Cuts
On Thursday, a highly anticipated inflation report could solidify expectations for the Federal Reserve to cut interest rates in the coming months. The consumer price index (CPI) report for June is scheduled to be released at 8:30 a.m. ET. Recent economic data suggests that both inflation and economic growth are slowing down. Last week, it was reported that unemployment in June rose to 4.1%.
Federal Reserve Chair Jerome Powell’s recent testimony on Capitol Hill indicated that the central bank sees the risks to the economy as more balanced between inflation and recession. Powell also emphasized that the Fed does not necessarily need to wait until inflation reaches the 2% target before implementing rate cuts.
What to Watch For
Economists surveyed by Dow Jones are expecting the CPI to rise by 0.1% month over month and 3.1% year over year. The core CPI, which excludes volatile food and energy prices, is projected to increase by 0.2% from May and 3.4% from June of the previous year.
The focus on unemployment and inflation trends could strengthen the case for rate cuts, according to experts. Trends indicate a gradual increase in unemployment and a downward trajectory in inflation, prompting the Fed to consider a rate cut.
It will be crucial to pay attention to the price changes in components that make up the CPI index, particularly if the numbers deviate from expectations. Areas like shelter and medical care services could be significant factors to monitor.
Market Impact
The release of the CPI report comes amid a bullish market sentiment. Stocks and bonds have been on the rise in July as investors anticipate a rate cut later in the year. The S&P 500 reached a new high on Wednesday.
Fed funds futures pricing indicates that traders anticipate the Fed to maintain rates at its upcoming meeting and then potentially cut in September. This expectation could limit the market response to Thursday’s CPI report, as it may not be a significant market mover.
However, there is a possibility of a market rally if the inflation reading turns out to be lower than expected. Investors who remain cautious due to previous inflation concerns may find reassurance in a cooler inflation report.
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