Briefing at a Glance:

  • Data released by the U.S. Bureau of Labor Statistics on Tuesday showed that consumer prices rose 3.5% year-over-year in June, down from a 4.2% increase in May and below market expectations. Minutes after the data release, Federal Reserve Chairman Kevin Warsh, testifying before Congress, pledged to push inflation back down to the central bank's 2% target level.
  • A 5.7% drop in energy prices—including a 9.5% plunge in gasoline prices—was the main driver behind the easing of price pressures in June, the Bureau of Labor Statistics noted in its report. Excluding volatile food and energy, core consumer prices were flat month-over-month and rose 2.6% year-over-year.
  • "For the Fed, the better-than-expected June CPI data may provide a reason to hold off on raising interest rates at its July 28-29 policy meeting," said Bill Adams, chief economist at Fifth Third Commercial Bank. However, he also noted, "The Fed still needs to see more favorable inflation news before it can stay on hold for the remainder of the year." He said this in a statement.

In-Depth Analysis:

Warsh testified before a congressional panel for the first time as Fed Chairman. He told lawmakers that the fight against above-target inflation was "just beginning."

"Although I reviewed the CPI data this morning and the results were better than expected, I'm not going to cherry-pick," he said in testimony before the House Financial Services Committee.

"I'm not going to stand here and say 'mission accomplished,'" Warsh added. "There is still a lot of work to be done."

He pointed out that after five years of above-target price increases, Fed officials are united on slowing inflation to 2%.

At the June meeting of central bank governors and regional Fed presidents, "no one was willing to tolerate higher prices—we made a clear and unanimous commitment that we will definitely achieve the target," Warsh said.

However, inflation could re-accelerate in July due to the collapse of the ceasefire agreement in the war with Iran and a rebound in oil prices.

Since June 30, Brent crude oil futures, the global benchmark, have risen about 17%, from $72 per barrel to $85 per barrel.

Nevertheless, the unexpectedly low inflation data prompted interest rate futures traders to reduce their bets on a 25-basis-point rate hike by Fed policymakers this month. The market now sees a 16.6% probability of a hike, down from 41.7% on Monday.

Speaking about the labor market and the Fed's full employment mandate, Warsh said: "The U.S. labor market looks broadly stable."

"Job growth is keeping pace with the size of the labor force," he said. "We're seeing relatively few layoffs, the job vacancy rate has only fluctuated slightly, and nominal wage growth is solid."