Bets on rate hikes as soon as September jumped after consumer prices continued head toward the Fed’s 2% target in June. The CPI, consumer price index actually fell 0.1% in June and the core CPI, which takes out food and energy prices was up only 0.1%. When I spoke his Jose Torres, senior economist at Interactive Brokers, he was quick to point out that was the first month of deflation in 23 months.
“This is propping up bets on rate cuts in September to about 82%,” he said, adding that he expects market participants to start looking for one or two cuts in the last two months of the year.
But Jose does not agree with people betting on the September rate cut. One big reason is the Fed wants to avoid being seen taking steps that could be perceived as being political, trying to influence the outcome of the election.
The other reason is base effects – which refers to the impact of comparing current price levels in a given month against price levels in the same month a year ago – could cause the July CPI numbers to move higher again, and put August in jeopardy for higher rather than lower numbers in August.
Jose adds this all up, along the fact that commodity prices are on the rise again, to conclude that the Fed will wait until December to make its first cut. Not the consensus view, which makes it all the more important sit back and relax and hear and see what he has to say.
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