Odds of Fed rate hike this month drop to 11% after soft inflation data

The probability of the Federal Reserve raising interest rates at this month's FOMC meeting has fallen to the low double digits, after both the June consumer price index and producer price index came in below market expectations.

According to CME FedWatch, the probability of a 0.25 percentage point rate hike at the FOMC meeting scheduled for July 28-29 stood at just 11.2% as of Thursday, with the odds of a hold at 88.8%. That marks a sharp reversal from three days earlier, when the probability had jumped as high as 46.5%.

The retreat reflects softer-than-expected June inflation readings. The CPI rose 3.5% year-on-year, falling short of the 3.8% forecast, while the PPI fell 0.3% from the previous month — its first negative reading since August last year.

However, the probability of a rate hike at the September FOMC meeting remains elevated at 48.8%. Some analysts interpret this as markets not abandoning the prospect of a hike altogether, but simply pushing back the expected timing to September.

Adding to uncertainty, international oil prices have climbed back above $85 per barrel since President Donald Trump announced a blockade of the Strait of Hormuz, raising concerns that the inflation outlook could deteriorate again.

Fed Chair Kevin Warsh, appearing before the Senate Banking Committee on Wednesday, acknowledged that AI-related investment is an upward factor for prices, but reaffirmed the Fed's commitment to price stability, saying AI would not cause sustained inflation.

"A one-time price increase does not necessarily lead to inflation," Warsh said, "because there will be a response on the supply side."

"If you ask whether AI investment will push up price indicators over the next 12 months, I would say it is possible," he added. "But whether that causes inflation is up to the Fed."