Persistent Tariff Concerns Overshadow Soft June CPI Data

Yields rise following mixed inflation data. Policy-sensitive yields declined 4 bps in the immediate aftermath of today’s mixed inflation report before reversing course throughout the remainder of the session. Yields closed the day 3-6 bps higher across the curve, marking a 6-8 bp climb from intraday lows. The rise in rates likely reflected expectations for further delays in rate cuts, and 2-year and 10-year yields are now 3.94% and 4.48%, respectively. Meanwhile, markets are now looking ahead to tomorrow’s PPI data for additional clues about tariff effects on inflation.

CPI accelerates in June, but at a still-muted pace. Today’s June CPI release logged another month of relatively cool inflation, but expectations for Fed cuts this year were largely unaffected. Core CPI climbed by 0.2% MoM, below expectations of a 0.3% advance but slightly higher than May’s 0.1% figure, while the YoY reading was in line with expectations at 2.9% vs. 2.8% in May. On a headline basis, MoM CPI rose by 0.3%, in line with expectations, and YoY CPI rose by 2.7% vs. expectations of a 2.6% advance. Lower car prices helped restrain core inflation growth during the month, though this was somewhat offset by faster price increases among goods categories uniquely exposed to tariffs. Despite today’s report extending a multi-month theme of softer inflation data, tariff impacts on certain price categories dampened initial enthusiasm from the top-line results. As a result, futures-implied expectations for Fed cuts were relatively unchanged vs. yesterday, with markets still largely expecting 2 moves in 2025.

Bessent suggests Powell should step down from Fed board in May. Chair Powell has been criticized repeatedly by President Trump and Treasury Secretary Bessent this year for the Fed’s prolonged rate cut pause. The disapproval has fueled talks of a “shadow” Fed Chair being appointed ahead of May 2026, when Powell’s term as Fed Chair ends. However, Powell’s term as a Fed governor doesn’t end until January 2028, meaning he could remain involved in policy decisions. Bessent said today that “Traditionally, the Fed chair also steps down as a governor… I think it’d be very confusing for the market for a former Fed chair to stay on also.” Bessent also stated that a “formal process” to appoint the next Fed Chair has already started, and current likely contenders include Bessent himself, Fed Governor Kevin Warsh, Trump’s National Economic Council director Kevin Hassett, and Fed Governor Christopher Waller.