U.S. inflation data for June came in well below expectations, prompting investors to reassess the Federal Reserve's near-term rate path. Bitcoin surged past $65,000 as risk assets rallied, while market odds for a July rate hike collapsed.
Inflation Cools More Than Expected
The Labor Department reported that the Consumer Price Index (CPI) fell 0.4% month-over-month in June, far exceeding the consensus estimate of a 0.1% decline and reversing May's 0.5% increase. Core CPI, which excludes food and energy, was flat for the month, missing the 0.2% gain expected and following a 0.2% rise in May. On an annual basis, headline CPI rose 3.5%, below the 3.8% forecast and down from 4.2% in May. Core CPI's year-over-year rate slowed to 2.6%, compared with the 2.8% projection and 2.9% in May. The data signal that inflationary pressures are easing steadily, reducing fears of further tightening.
Fed Chair Warsh Testifies Before Congress
Shortly after the CPI release, Federal Reserve Chair Kevin Warsh delivered his first congressional testimony since taking office. In prepared remarks, Warsh acknowledged that high inflation has imposed a heavy burden on households and businesses, stating the central bank has "no tolerance for persistently elevated inflation" and remains committed to returning inflation to its 2% target. The Fed held the federal funds rate at 3.5%-3.75% in June, but hawkish language in the post-meeting statement had led markets to price in a possible rate hike as soon as July. Warsh also highlighted strong U.S. productivity growth, noting that business investment has accelerated, particularly in data centers and AI-related equipment and software, even before fully capturing AI's potential benefits. He said equipment investment rose about 8% over the past year through Q1, while high-tech spending surged nearly 25% in the last four quarters. The Fed has formed a working group to study AI's impact on inflation and the labor market.
Rate Hike Odds Plummet, Markets Reprice
Just a day earlier, Fed Governor Christopher Waller had signaled support for a July rate hike if core inflation did not fall quickly, pushing the probability of a move to nearly 50%. But after the flat core CPI reading, rate futures slashed the implied probability of a July hike to about 12%. However, the odds for a September hike remained relatively unchanged at roughly 51.2%, indicating lingering caution about medium-term inflation risks.
Stocks and Crypto Rally
With the benign inflation data and no fresh hawkish signals from Warsh, risk appetite rebounded. The Nasdaq rose about 1%, while U.S. Treasury yields fell sharply. Cryptocurrencies also gained: Bitcoin climbed roughly 3.5% over 24 hours to around $64,500, and Ethereum advanced 5% to $1,865. Analysts suggest that if inflation continues to moderate, the Fed may have more room to hold steady, supporting risk assets like tech stocks and crypto. Still, with officials stressing the need to control inflation, markets will remain highly attentive to policy signals in the months ahead.