The Federal Reserve is now focusing on future inflation trends instead of past ones, indicating that interest rate cuts are not likely to happen soon. Recent alternative inflation measures for the U.S. showed increases in June, making it harder for the Fed to decide on possible rate cuts. The Dallas Fed’s trimmed mean Personal Consumption Expenditures (PCE) index, which excludes extreme price changes to show core inflation, increased at an annual rate of 3.4% in June. This resulted in a year-over-year rise of 2.7%, a slight increase from 2.6% in the previous months.

Cleveland Fed’s Median PCE

The Cleveland Fed’s median PCE, which aims to reduce volatility, jumped to a 3.6% annual rate in June, up from 2.5% in May. The year-over-year growth hit 3.15%, a small increase from 3% the month before. Additionally, the market-based core PCE index, which excludes certain prices, rose by 0.29% in June, resulting in a 2.6% increase over the year—the highest since March 2024, progressing from 2.3% in April. These stronger inflation numbers indicate that price pressures are more persistent than the headline figures suggest, likely leading to more in-depth discussions at upcoming Federal Reserve meetings. The Federal Reserve’s stance shows that interest rates will remain unchanged for a while. Alternative inflation figures from June are revealing that core price pressures are growing stronger. This suggests that the fight against inflation is far from over.

Official June CPI Report

The official June Consumer Price Index (CPI) report, received mid-month, confirmed this trend, showing a year-over-year inflation rate of 3.3%. This signals the end of the disinflation we experienced earlier in the spring. As a result, the Fed maintained the current rates during their July meeting, highlighting this persistent issue. This has led market expectations for a September rate cut to drop below 30%. For us, this suggests preparing for higher interest rates to last longer. We should consider that the market might be too hopeful, which may create an opportunity to short September SOFR futures. Any increase in Treasury bond prices should be viewed with caution. This situation poses challenges for stocks, especially in tech and growth sectors sensitive to borrowing costs. We anticipate increased market uncertainty, which might cause the VIX to rise from its current level around 14. It would be wise to think about hedging strategies, such as buying puts on the Nasdaq 100 index. A hawkish Fed supports a strong U.S. dollar against other currencies. With central banks in Europe and other regions looking to ease their policies, the dollar becomes a favored trade. We see potential value in long positions on the U.S. dollar against the euro. This scenario reminds us of late 2023 when lowering inflation to the 2% target became particularly challenging. We learned back then not to oppose a Federal Reserve determined to complete its objectives. Create your live VT Markets account and start trading now.

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