February 19, 2025

Inflation Relief: Markets Brace for Fed Rate Cuts

After years of rising costs, Americans are finally seeing some relief. U.S. inflation dropped 0.1% month-over-month in June, surpassing expectations for a 0.1% rise. Annually, consumer prices increased by only 2.97%, the smallest jump in over three years.

The Bureau of Labor Statistics’ report showed a significant dip in gasoline prices, contributing to the overall inflation decrease. Core inflation, excluding volatile food and energy prices, also rose less than anticipated. The slowdown in shelter price increases played a key role, with core inflation up just 0.06% month-over-month and about 3.3% year-over-year, marking another three-year low.

After years of high interest rates, professional investors now believe the Federal Reserve has tamed inflation, and rate cuts are expected soon. Analysts suggest that the Fed could cut rates by September, with a high probability of at least one cut by December.

Despite the positive inflation news, the stock market experienced a mixed reaction. While the blue chip S&P 500 and tech-heavy Nasdaq fell, an equal-weighted version of the S&P 500 rose, indicating a rotation from tech stocks to value-focused offerings. Big tech stocks, which have seen significant gains over the past two years, fell sharply, while smaller, value-oriented stocks gained traction.

Analysts note that the market may have already priced in the good news, leading to the recent shifts. As inflation continues to cool and interest rates potentially decrease, the market dynamics are expected to evolve further.

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