Fed's Core Inflation Gauge Cooled: U.S. Economy Grew Slower Than Expected in Q2

The Federal Reserve's key inflation measure, the consumer price index (CPI), fell to 3.3% in June from a near three-year high of 3.4%. This occurred as the U.S. economy grew slower than expected in the second quarter, with lingering inflation concerns pushing the central bank toward rate hikes.

U.S. Economy Grew Slower Than Expected in Q2

The Bureau of Economic Analysis (BEA) reported that U.S. real GDP grew at an annual rate of 1.5%, well below Wall Street's expectation of 2.1%.

Consumer Spending Accelerated

■Consumer spending, which represents roughly two-thirds of all economic activity, accelerated at a 3.2% annual rate.

■This comes amid increased business investments in artificial intelligence (AI), underscoring the resilience of the U.S. economy.

Critical Data for Fed's Rate Policy

■CME Group's FedWatch tool shows traders pricing in a 59.2% chance of the Fed raising rates in September.

■These odds rise through the year, hitting 71% in October and 83.5% in December.

Fed Chair Kevin Warsh's Inflation Policy

Fed Chair Kevin Warsh has emphasized zero tolerance for 'persistently elevated inflation,' stating the central bank has a 'resolute commitment' to restoring price stability.

Divergent Views Among Fed Governors

■Dallas Fed President Lorie Logan, Minneapolis Fed President Neel Kashkari, and Cleveland Fed President Beth Hammack voted to raise rates by 0.25%.

■However, many Fed officials expect rates to remain near current levels or slightly below by year-end.

Despite the U.S. economy's resilience, the Fed's hawkish stance on inflation suggests a high likelihood of rate hikes, which could impact global markets and the risk-on/off cycle.