Traders now see only about a 10% chance of a quarter-percentage-point rate increase at the Fed's July 28-29 meeting, versus 35% before the report, based on Fed funds futures prices as traded at the CME Group.
They give a hike at the Fed's September 15-16 meeting about a 60% likelihood, down from more than 90% before the release of the CPI data.
Fed officials and analysts remain cautious
The benign readings may help assuage worries at the Fed that high oil prices from months of conflict in the Middle East are accelerating inflation in a more persistent manner, requiring a response from the U.S. central bank.
Oil prices, which had cooled in June as the U.S. and Iran held peace talks, are up sharply again in recent days after hostilities around the Strait of Hormuz have reignited. About 20% of the world's crude oil supply was shipped through that waterway before the start of the war in late February.
Fed Governor Christopher Waller said on Monday that the central bank may need to raise rates in the "near term" if underlying inflation, as measured by the core CPI, stayed hot.
Waller also said he would need to see several months of cooler inflation data to feel comfortable about not hiking rates at all. Though Waller does not speak for the Fed as a whole, his views have often been a bellwether for shifts in the U.S. central bank's thinking.
Fed Chairman Kevin Warsh is scheduled to begin two days of testimony in Congress later Tuesday morning. He will tell lawmakers on the U.S. House of Representatives Financial Services Committee in his first hearing that the central bank has "no tolerance" for persistently elevated inflation, according to his prepared remarks.
"We still think it's a matter of when, rather than if, the Fed will raise interest rates," analysts at Capital Economics wrote. "The big picture to us is that the AI investment boom, coupled with signs of rebounding consumer demand, will continue to keep core inflation above target."
Traders price in lower odds of July rate hike
Federal Reserve policymakers are far more likely to wait to increase interest rates than to do so later this month, traders bet on Tuesday, after a government report showed inflation cooled more than expected in June.
The Consumer Price Index increased by a still-high 3.5% in the 12 months through June after surging 4.2% in May, the report from the U.S. Bureau of Labor Statistics showed.
Excluding food and energy, the so-called core CPI increased 2.6% on a year-on-year basis in June after rising 2.9% in May. Compared to the prior month, the core CPI, which analysts see as a guide to underlying inflation pressures, was unchanged.
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