Fed July rate hike odds drop to 12% as CPI eases but inflation stays

The market now sees only a 12.3% chance of a Fed rate hike at the July 28‑29 meeting after June CPI slipped 0.4% month‑over‑month, but futures still price a 25‑basis‑point increase in the September‑October window【5】.

CPI dip and lingering inflation pressure

The Labor Department reported that the consumer price index fell 0.4% in June, the largest monthly decline since April 2020, while the producer price index slipped 0.3% MoM【5】. Despite the drop, year‑over‑year CPI remains at 3.5%, well above the Fed’s 2% target, and PPI is up 5.5% YoY. The modest month‑over‑month easing was driven by lower international oil prices and a slowdown in housing and goods price gains, but the underlying price‑level momentum has not shifted.

Fed officials signal continued tightening

Fed Governor Lorie Logan, who holds a voting seat on the FOMC, warned that the short‑term slowdown masks deeper inflation stickiness. She argued that a modest rate increase now would avoid the larger economic pain of a later, more aggressive tightening if inflation were to become entrenched【5】. While she did not specify a timing or magnitude for a hike, her remarks suggest the Fed will keep policy flexible and may target a 25‑bp move later in the year, a view already reflected in rate‑futures pricing for September‑October【5】.

Market pricing and expectations

Rate‑futures data show a 12.3% chance of a July hike, indicating that traders largely expect the Fed to hold rates steady at the upcoming meeting. However, the term structure of futures points to a near‑consensus of a 25‑basis‑point increase in the fourth quarter, with September positioned as a secondary option. This split reflects the tension between the recent CPI dip and the still‑elevated inflation readings that have persisted for five consecutive years above the 2% goal【5】.

What to watch

• July 28‑29 FOMC meeting – any shift in the hike probability will move rates and the dollar.
• Upcoming CPI releases – a further month‑over‑month decline could revive expectations of a pause, while a rebound would reinforce the market’s pricing of a later hike.
• Core inflation measures – especially the core CPI excluding housing, which Logan cited as a gauge of underlying price pressure.

The divergence between a short‑term CPI slowdown and persistent year‑over‑year inflation keeps the Fed’s policy path uncertain, leaving markets to balance the near‑term pause against the likelihood of a modest tightening later in 2026.