Hope for Rate Cuts Gets a Big Boost from Slowing Inflation

The Labor Department reported monthly inflation fell in June, strengthening the case for the Federal Reserve to cut interest rates.

Photo of Pepsi cans
Photo by Ja San Miguel via Unsplash

Sign up for smart news, insights, and analysis on the biggest financial stories of the day.

Nothing like a little disinflation to make investors feel less deflated about what the Fed might have in store for us. 

The US economy got a jolt of good news Thursday when the Labor Department reported that monthly inflation fell in June, strengthening the case for the Federal Reserve to cut interest rates in the coming months.

The Rating Game 

The consumer price index (CPI), a broad measure of the cost of US goods and services, decreased by 0.1% from May, pulling the annual inflation rate down with it to 3%. “Core” CPI — which strips out volatile energy and food prices and is closely watched by Wall Street — rose 0.1% from May and 3.3% annually for its slowest pace since August 2021.

Coupled with the slowing labor market that Federal Reserve Chair Jerome Powell flagged before Congress earlier this week, the inflation data suggests interest rates, currently nestled at a 23-year high, could finally be in line for cuts. Indeed, investors are pricing in an 85% chance of a rate cut in September, according to CME Group’s FedWatch. Companies and consumers alike could benefit:

  • PepsiCo executives said Thursday that sales volume at their Frito-Lay North America division fell 4% in the latest quarter due to a “cohort of consumers that have become more price conscious” amid inflationary pressure. PepsiCo missed its revenue expectations for only the second time since 2017, with the results suggesting that hiking prices — PepsiCo’s were upped 5% overall in the quarter — is no longer a silver bullet.
  • The cooling inflation helped push down US Treasury bond yields, with investors revising their interest-rate forecasts. Lower yields can benefit consumers because mortgage and credit card rates are frequently tied to the 10-year yield, which fell 9.5 basis points to a four-month low.

Low Tech: Lower inflation and lower interest rates could unlock value for undervalued or struggling stocks, and that prospect was enough to sting the Big Tech firms that have led the markets in recent years. The small- and medium-cap Russell 2000 rose 3.3% to a three-month high, but the S&P 500 and Nasdaq dipped slightly as investors rotated out of firms like Meta (down 4% Thursday), Nvidia (down 5.5%), and Microsoft (down 2%).