TLDR
- June CPI fell 0.4%, the biggest monthly drop since April 2020.
- Annual CPI slowed to 3.5%, below the 3.8% forecast.
- The 10-year Treasury yield fell to about 4.55% after CPI data.
- July Fed hike odds dropped sharply after the inflation report.
- Kevin Warsh said the Fed has “no tolerance” for high inflation.
U.S. Treasury yields fell on Tuesday after June inflation came in cooler than expected, pushing traders to cut expectations for a Federal Reserve rate hike at the July 29 meeting while debate continued over whether lower CPI pressure can last.
Treasury Yields Drop After Cooler CPI
The consumer price index fell 0.4% in June, marking a sharper decline than economists expected. Annual CPI inflation slowed to 3.5%, below the 3.8% forecast in the Dow Jones survey.
The 10-year Treasury yield fell 6 basis points to 4.553% by 8:33 a.m. ET, while the 2-year Treasury yield dropped 8 basis points to 4.181%. The 30-year Treasury yield declined 3 basis points to 5.064%.
Bond yields move opposite to prices, so the decline showed stronger demand for Treasuries after the inflation report. The 2-year yield, which is closely tied to Fed policy expectations, moved lower as traders reduced bets on a near-term rate increase.
The move came after Treasury yields had risen in recent sessions as oil prices climbed during the U.S.-Iran war. Higher oil prices had raised concern that inflation could stay firm, but the June CPI report did not show that pressure in consumer prices.
Fed Hike Odds Fall Before July Meeting
Rate hike odds dropped sharply after the CPI release. CME FedWatch showed traders placing a 17% chance of a 25 basis point hike at the July meeting, down from 42% on Monday.
The Kobeissi Letter said the odds of a July 29 Fed rate hike “crash to 8%” after CPI posted its biggest monthly decline since April 2020. That estimate came from market-based pricing and may differ from other rate probability tools.
Polymarket odds for a Fed hike this year also fell after June inflation printed negative. The lower odds suggest traders see less pressure on the Fed to raise rates immediately, although later meetings still remain in focus.
Source: X
Chris Rupkey, chief economist at FWDBonds, said, “You can take those Fed rate hikes off the table for now as the current neutral Fed funds rate of 3.75% is perfectly balanced for the upside and downside risks to the economy and inflation.” He added, “Bet on it. The markets are.”
Markets still showed a higher chance of a rate increase by September. Traders placed about a 60% probability that the Fed’s target rate will be a quarter or half point higher by that meeting.
Warsh Says Fed Has No Tolerance for Inflation
Fed Chairman Kevin Warsh’s prepared testimony also drew attention. Warsh said the central bank’s main task is to set monetary policy correctly and keep inflation under control.
“The Fed’s number one objective is to get monetary policy right — or as near to it as we possibly can,” Warsh said. He added, “That is our clear and constant aim, the star we steer by.”
Warsh also said the Fed has “no tolerance for persistently elevated inflation.” He added, “If we get policy right — and we will — the inflation surge of the last five years will be a thing of the past.”
Those comments suggest the Fed may stay cautious even after one soft CPI report. A single monthly decline may reduce near-term hike pressure, but policymakers are still watching energy prices, wages and broader inflation trends.
Gold also rose after the CPI data. Peter Schiff said gold gained $100 as June CPI fell 0.4%, but he argued the main driver was a 30% drop in oil. He warned that oil was already up 20% in July and claimed a lower official inflation rate could give the Fed “an excuse to ignore the rise in actual inflation.”
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