• Short-term interest-rate futures fell post-CPI, yet traders maintain strong expectations for September and December Fed rate cuts.
  • The July CPI data showed mixed signals, with core inflation slightly firmer but labor market softness supporting the case for easing.
  • Market pricing aligns with consensus models projecting a shift from the current 4.50% policy rate toward 4.25% by year-end.

Fed Rate Cut Bets Hold Steady Despite CPI Noise

US short-term interest-rate futures dipped immediately after the July CPI release, reflecting a knee-jerk reaction to slightly firmer core inflation figures. However, traders quickly shrugged off the noise, keeping bets firmly in place for a Federal Reserve rate cut in September and another in December. The market’s resilience underscores a broader conviction that disinflation is progressing—albeit unevenly—and that labor market cooling justifies easing despite lingering price pressures.

The Bureau of Labor Statistics reported July headline CPI at 2.8% year-over-year, aligning with pre-release forecasts, while core inflation edged up to 3.0% y/y. Monthly figures showed a 0.3% rise in headline CPI and a 0.4% increase in core, slightly above some estimates. Yet, with unemployment ticking up to 4.2% and payroll growth slowing to 73,000, the data reinforced expectations that the Fed will prioritize labor market softness over transient inflation bumps.

Tariffs and Goods Inflation Add Complexity

Analysts pointed to recent tariff measures as a key driver of goods-price inflation, which kept core CPI elevated. "The tariff pass-through is real and could persist for another quarter," said one strategist, speaking on condition of anonymity. This complicates the Fed’s calculus, but not enough to derail cuts, as services disinflation and employment trends take precedence.

Futures markets implied a 70% chance of a September cut shortly after the data release, with a follow-up cut in December priced at roughly 50%. The Cleveland Fed’s nowcast, which had projected core CPI near 3.0% y/y, lent credibility to the view that inflation is settling into a manageable range—supportive of gradual easing.

What’s Next?

Attention now turns to the Jackson Hole Symposium and upcoming PCE data, which could fine-tune the Fed’s September decision. If core inflation holds around 0.3–0.4% monthly, the path to 4.25% by year-end remains plausible. But as one trader noted, "The Fed’s patience is wearing thin with goods inflation. They’ll cut, but they’ll keep their options open after September."