While officials were encouraged by a step-down in price pressures last month, they’re not inclined to pronounce an end to their battle to rein in inflation that has repeatedly surprised them with its persistence. Contributing to their caution: A keen desire to avoid repeating the mistake of the 1970s, when the Fed prematurely let up on its efforts to contain inflation, only to see price increases reaccelerate to double-digit levels later.
“It’s really too early to say that we’ve declared victory on inflation,” Federal Reserve Bank of San Francisco President Mary Daly told CNBC on July 13.
Investors have increased bets that the widely anticipated quarter-percentage-point increase at the Fed’s July 25-26 meeting will be the central bank’s last in this credit tightening cycle. Stock and bond prices bounded higher on those expectations this past week, with the yield on the Treasury’s two-year note – a market barometer of the Fed’s intentions – falling to 4.76% from 4.95% on July 7.
Driving the rally: A big drop in inflation last month. Consumer prices rose 3% in June from a year earlier, compared with 4% in May, the Labor Department reported on July 12. That was the smallest increase in more than 24 months and well below the 9.1% surge seen just a year ago.