U.S. June Inflation Shifts Fed Rate Cut Odds Down to 41.3% in September

The U.S. June inflation data, released this week, has shifted market expectations regarding the Federal Reserve’s monetary policy outlook. The CME Group’s FedWatch tool now shows the probability of a rate cut at the September Federal Open Market Committee (FOMC) meeting has dropped to 41.3%, while the likelihood of the Fed maintaining the current federal funds rate range of 4.25% to 4.50% has risen to 58.7%[1]. This adjustment came after the Fed decided to hold rates steady during its July 29–30 meeting, a decision coinciding with stronger-than-expected second-quarter GDP growth figures[1].

Market participants are now pricing in a 61.5% chance of a rate cut following the October meeting, with the probability rising further to over 85% ahead of the December 10 meeting. However, uncertainty remains as potential inflationary pressures or trade tensions could delay the pace of rate reductions[1]. Most investors still expect an overall downward trend in interest rates by the end of the year.

The federal funds rate, a core instrument of the Fed’s monetary policy, influences short-term borrowing costs and indirectly impacts long-term rates through mechanisms such as the prime rate. A cut in short-term rates can lead to a steeper yield curve—where short-term yields fall while long-term yields rise—as inflation expectations increase. This scenario could negatively affect returns for savings accounts, money market funds, and Treasury bills, while making longer-term bonds more appealing[1].

In the equity market, a more accommodative Fed policy is typically favorable for stocks. Lower rates reduce borrowing costs and encourage economic growth, which supports corporate earnings. Growth sectors—particularly technology and small-cap stocks—tend to benefit most from rate cuts, as these companies often rely heavily on external financing and are sensitive to changes in capital costs. However, investors should remain cautious, as the Fed historically cuts rates in response to economic weakening, which can negatively affect overall market performance[1].

The latest FOMC meeting reaffirmed the current rate stance, with two members dissenting in favor of a rate cut. This internal disagreement highlights the ongoing debate at the Fed regarding the timing of rate reductions, especially in light of mixed economic signals[2].

Sources:

[1] How to Invest for a Fall Interest Rate Cut by the Fed (https://www.kiplinger.com/investing/stocks/how-to-invest-for-a-fall-interest-rate-cut-by-the-fed)

[2] Research Report (https://www.icicibank.com/corporate/globaltradeservice/research-reports)