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Calm prevailed across Wall Street as an in-line inflation reading bolstered speculation that the Federal Reserve will have room to cut rates in September, driving stocks higher and short-dated bond yields lower.
The S&P 500 topped 6,400, hitting a fresh record. The Russell 2000 index of small firms climbed 2%. While an initial rally in Treasuries faded, money markets priced in an about 90% chance of a Fed reduction next month. Two-year yields, which are more sensitive to imminent policy moves, dropped four basis points to 3.73%. A dollar gauge slid 0.5%.
Underlying US inflation accelerated in July to the strongest pace since the start of the year, though a tepid rise in goods prices tempered concerns about tariff-driven pressures. The core consumer price index rose 0.3% from June. That was in line with forecasts. On an annual basis, it picked up to 3.1%.
The CPI data gave ammunition to those betting the Fed has cover to resume cutting as soon as next month, while easing some concerns that new tariffs might stoke lasting price pressures.
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"Inflation is on the rise, but it didn’t increase as much as some people feared,” said Ellen Zentner at Morgan Stanley Wealth Management. “In the short term, markets will likely embrace these numbers because they should allow the Fed to focus on labour-market weakness and keep a September rate cut on the table.”
For equities, it adds to a rally driven by persistent enthusiasm over artificial intelligence and strong corporate earnings. “Stocks can continue to move higher, and it is going to take a much larger inflation number – or other shock to the market – for a correction to commence,” said Chris Zaccarelli at Northlight Asset Management.
US officials have kept interest rates unchanged this year in hopes of gaining clarity on whether tariffs will lead to sustained inflation. At the same time, the labour market — the other half of their dual policy mandate — is showing signs of losing momentum.
EJ Antoni, President Donald Trump’s pick to lead the Bureau of Labour Statistics, has suggested suspending the agency’s monthly jobs reports and publishing only quarterly numbers until issues with data collection are corrected.
In a social media post on Tuesday, Trump resumed his criticism of Fed Chair Jerome Powell over the central bank’s decision to hold interest rates steady. Fed Bank of Richmond President Tom Barkin said uncertainty over the direction of the US economy is decreasing, but it’s still unclear whether the central bank should concentrate more on controlling inflation or bolstering the job market.
The Fed’s policy stance is highly data-dependent, and with inflation contained and labour market softness increasingly evident in revised payroll data, the emphasis will now be skewed toward employment, according to Alexandra Wilson-Elizondo at Goldman Sachs Asset Management.
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“Inflation remains under control for the moment, which means the risks are tilting toward the Fed’s full employment mandate,” said Jason Pride at Glenmede. “The stars appear to be aligning for a September rate cut.”
To Skyler Weinand at Regan Capital, Tuesday’s CPI data was tame enough that it gives the Fed the green light to cut rates by at least 25 basis points in September and opens the possibility of a larger 50-basis-point cut in September.
Neil Dutta at Renaissance Macro Research said the market reaction to today’s data is “surprising.” “Stocks are rallying because a September cut is a lock; however, if I take the data at face value, it implies that tariffs are not being passed onto consumers, which means firms are tolerating a profits margin squeeze for the time being,” he said.
At TradeStation, David Russell says that while Wall Street is breathing a sigh of relief, anxiety will likely continue as tariffs work their way through supply chains.
“This could be the calm before the storm,” said Greg McBride at Bankrate. “A slew of tariffs are taking effect this month. It may take a few months before those costs make their way fully to the consumer, but inflation is poised to pick up further in the remainder of 2025.”
There is some sign of tariff pass-through to consumer prices but, at this stage, it is not significant enough to ring alarm bells, according to Seema Shah at Principal Asset Management.
“Markets like today’s inflation print as it means the Fed can lower rates unheeded next month, she said. “Rate-cut decisions in October, December and beyond may well be more complicated.”
With CPI out of the way, the focus will shift to Friday’s retail sales figure, where we’ll see if consumers appear as upbeat as corporate earnings commentary has made them seem and amid worries about the labour market, according to Bret Kenwell at eToro.
