The latest CPI inflation report came in at 2.4%, nudged up a bit from the previous month's 2.3% but still better than many economists had penciled in. Core inflation held steady at 2.8%. It wasn't exactly a game-changer, but it did offer a slight reprieve.
The Federal Reserve, however, isn't exactly rushing to open the champagne. Despite this slight cooling in headline inflation, they're sticking to their guns, aiming for that 2% target. The fact that tariffs didn't really push inflation higher in May probably felt like a welcome relief rather than a shock, considering companies had already locked in prices and built up their inventories like they were preparing for a major sale.
Speaking of which, the jobs report for May showed a net gain of 139,000 jobs, keeping the unemployment rate exactly where it was at 4.2%. But digging deeper, the picture isn't all that rosy. The number of jobs added has been trending downwards over the past few years, and they're also recalibrating past figures, showing the market was perhaps a bit overheated earlier.
So, where does that leave us with the Fed? The market's CME Fed Watch tool is currently showing virtually no chance (0%) of an interest rate cut next week, with a near certainty (99.9%) that rates will be held steady. But the outlook is shifting. The probability of a cut by July edged up to 16.5%, and the chances for a rate reduction by September have climbed above 67%. That means a cut by then is now more likely than not.
And then there's President Trump, adding fuel to the fire with his calls for a significant rate cut. He's suggesting a 1 percentage point reduction, putting pressure on Fed Chair Powell, who keeps emphasizing the Fed's independence. It's a classic tug-of-war.
It's an interesting standoff. On one side, inflation data that's better than expected, and on the other, a labor market that's still functioning but showing signs of fatigue. Both factors could eventually warrant action, but the Fed seems determined to wait. The question hanging in the air is how long they can keep the lid on this pot. The market is betting on a hold next week, but the pressure is building for a move later this year. We'll have to wait until the Fed's next meeting for more clarity.