Powell markets

Federal Reserve Chairman Jerome Powell has repeatedly said that he's looking for 'greater confidence' that inflation will sustainably fall to the Fed's 2% target.

Headline inflation is still 3.0% but the past three month-over-month numbers were -0.1%, 0.0%, +0.3% -- a trend that's on track to hit the target. Moreover, the Fed has been noting that market-based measures of rents have been falling but that calculations in the inflation index badly lag. That should give them confidence that shelter inflation (which ran at +5.2% y/y in today's report) will soon be a source of disinflation.

US shelter inflation lag
US shelter inflation lag

The market has now gained greater confidence that cuts are coming, with September now priced at 24 bps -- or nearly fully priced in. By year-end, market pricing is for 59.5 bps -- so two quarter point cuts and a 36% chance of a third.

For June of next year, 136 bps of easing is priced in from the current level of 5.25-5.50% (effective Fed funds at 5.329%).