The Fed's interest rate cut enters the "finals", the market pays special attention to this change!

The unexpected decline in the US June CPI data may shorten the "last mile" of the Fed's fight against inflation to the final sprint, boosting policymakers' confidence that they are winning this battle and paving the way for rate cuts in the coming months.

The Labor Department said on Thursday that the CPI data slipped 0.1% last month after remaining unchanged in May, marking the softest monthly reading since the early stages of the pandemic in May 2020, while the 3% year-on-year increase is the lowest in the past year.

At the meeting on July 30-31, policymakers are expected to maintain the policy rate at 5.25%-5.5%, but given the easing of price pressures, they may reconsider the timing of rate cuts.

Following July, the next Fed policy meeting will be held in mid-September. Traders quickly reacted to Thursday's data, with the likelihood of a rate cut in September now estimated at around 90%, up from the previous estimate of about 70%, and the expectation of a second rate cut moved up to November, with a 50% chance of a third rate cut by the end of the year.

JPMorgan and Morgan Stanley have brought forward their expectations for the first rate cut from November and December to September.

Neil Dutta, head of economic research at Renaissance Macro Research, said that "dovish individuals" have reason to cut rates at the July meeting or even earlier.

He added that although a rate cut in July may be too sudden, as the Fed likes to "telegraph" in advance to allow the public time to adjust, supporters of a rate cut "should not rule out the possibility of a rate cut in July unless Powell sends a strong signal for a rate cut in September."

Omair Sharif, president of Inflation Insights, said that monthly housing inflation slowed to 0.2%, the weakest since August 2021, which is "clearly the most important development" as Fed officials have been confident about the slowdown in housing costs but are unwilling to act until there is evidence in official data.

Next Monday, Powell will deliver a public speech at the Economic Club of Washington, providing an important platform to share how the Fed interprets the latest round of inflation. Fed governors Waller, Quarles, and Bowman also plan to speak next week, marking the last round of speeches before the communication blackout period leading up to the policy meeting on July 20.

People will pay particular attention to any changes that may be made in the Fed's July policy statement and whether officials decide to no longer refer to inflation as "elevated."