Tepid CPI report gives the Fed more breathing room
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July's consumer price index report favored investors and the Federal Reserve. Headline CPI rose 0.1% last month from June , and at an annual rate of 3.4%, matching Dow Jones consensus estimates from economists. Core CPI — which strips out volatile food and energy prices — also matched estimates. Stocks got a boost after the release signaled that inflation wasn't running away amid the ongoing U.S.-Iran war. It also gave the Fed some room to keep interest rates unchanged at their next policy meeting in September. "We don't see any alarm bells ringing in today's CPI inflation report that would tell Fed officials to rush out and hike interest rates next month," wrote Chris Rupkey, chief economist at FWDBonds. Indeed, the CME Group's FedWatch tool showed a 62% chance the Fed will keep its overnight rate in a range of 3.5%-3.75%. That was up from 52% on Tuesday. Prediction markets are also pointing to the Fed keeping rates on hold, with traders on Kalshi betting there's a 69% chance the central bank will stay put. Yet this is "by no means definitive," according to Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. "The September decision now comes down to the August payrolls and CPI combination." Here's what others on the Street had to say about the July inflation print: Lindsay Rosner, head of multi sector fixed income investing at Goldman Sachs Asset Management : "One down, one to go. With another round of inflation data due before the September FOMC meeting, it remains all to play for, but today's in-line report was a good start. Contained core inflation adds to the encouraging signs in last month's release of a moderation in underlying inflation, helping strengthen the case for a September hold." Ryan Weldon, portfolio manager at IFM Investors: "The July CPI release presented a mixed inflation picture, with headline inflation reflecting the impact of higher energy prices while core inflation continued to moderate, albeit gradually. The Fed will likely look through volatility in headline inflation and focus on easing core services inflation as justification for remaining on hold in September. However, under Chair Warsh, the Fed risks undermining its credibility unless it provides a clearer reaction function should inflation fail to make sufficient progress toward its 2% target." Skyler Weinand, chief investment officer at Regan Capital: "Wednesday's CPI was in-line with expectations, which is welcome news, but it is becoming clear that the CPI data is moving in lockstep with oil prices, and the Federal Reserve has no control over the Strait of Hormuz, and this paints a long and unknown road for inflation to get back towards the 2% target. The elevated, but stable CPI data will keep the Federal Reserve data dependent in determining its next move as we still have another few key data prints to come out between now and the Fed's next meeting in September." Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management: "In-line inflation will keep the 'no need to hike rates' narrative that took hold after last week's jobs report intact. There will be another round of inflation data before the September FOMC meeting, so the storyline could still change. But unless those numbers tell a much different story, the Fed will likely still be in a position to leave rates unchanged next month." Josh Jamner, senior investment strategy analyst at ClearBridge Investments: "Today's release does little to change investors understanding of and expectations for the inflationary and economic backdrop. The lack of a 'hot' reading is a modest positive at the margin for risk assets, but with next month's release looming we do not expect today's print to have a substantial impact on markets." Bret Kenwell, U.S. investment analyst at eToro: "An in-line CPI report takes a major inflation surprise off the table after oil prices surged more than 20% in July and threatened to reignite price pressures. Although inflation remains elevated, today's report should give investors greater confidence that peak inflation appears to be behind us. Gary Schlossberg, global strategist at Wells Fargo Investment Institute: "This month's CPI inflation reading, combined with a lackluster July jobs report, may keep hawkish Fed officials at bay in September. However, we remain guarded on the near-term outlook for inflation amid volatile oil prices tied to the ongoing Middle East conflict along with lingering core price pressures from a strong economy and the AI boom." Bill Adams, chief U.S. economist, Fifth Third Commercial Bank: " The July CPI report narrowly meets the bar to nudge the Fed toward holding rates steady at their next meeting in September. Fed policymakers signaled in July that core inflation would have to improve between now and then for them to refrain from raising interest rates. The Fed will also see the August CPI reports among a number of other data releases, so the CPI is not the final word." Luke Rahbari, CEO of Equity Armor Investments: "This is essentially what the Fed wants to see. The combination of negative month-over-month headline CPI and core inflation holding around 2.6% gives the Fed the narrative it wants: we're seeing some cooling, but there is no collapse in the economy. Prices in some areas are stabilizing and, in some cases, coming down. That said, we've had so many starts and stops with the war in the Middle East, along with wild swings in oil and gasoline prices, that this picture could change day to day."