Despite continued increases in inflation, markets continue to price in at least two rate cuts in 2025
Betting markets still expect at least two rate cuts by the Federal Reserve the rest of 2025 after the release of the latest Consumer Price Index (CPI) inflation report on Tuesday.
The report, released by the Bureau of Labor Statistics, showed an increase of 0.2% in July, with an annual increase of 2.7%. The core CPI, which excludes volatile food and energy commodities, increased 0.3% in July to 3.1% annually.
Inflation increases were mainly in line with what experts were predicting. Economists expected the overall CPI to range between 2.7% and 2.8% annually, while core CPI was expected to be between 3.0% and 3.1%.
The increase in core CPI was the largest month-over-month increase since January, a possible sign that impacts of the Trump administration’s tariffs are showing up in inflation numbers.
Sam Williamson, First American senior economist, said that while the data likely points to future rate cuts, he believes the Fed will want more data before committing to a rate change.
“While Core CPI came in hotter than forecast, tariff impacts remain spotty," Williamson said. "Tariffs are beginning to push up prices in select import-heavy categories, like furniture and car tires, but broader impacts remain muted. Some tariff-sensitive areas, like men’s and women’s apparel, even saw price declines—suggesting businesses may still be absorbing cost pressures.
“The Federal Reserve may keep the door open to rate cuts later this year, but will likely want firmer evidence that tariff and labor-related costs aren’t feeding into broader, persistent inflation.”
Shelter costs were blamed as the primary factor in the all items monthly increase. It increased 0.2% in July to an annual figure of 3.7%.
Overall energy costs fell 1.1% in July and have fallen 1.6% annually. This was fueled by a 2.2% drop in gasoline costs for the month. Annually, gasoline has fallen 9.5%.
Fed keeping a close eye
This is one of two CPI reports that will be released between meetings of the Federal Reserve’s Federal Open Market Committee. The next rate announcement is slated for Sept. 17.
While the Fed keeps an eye on this report, it’s the Commerce Department’s personal consumption expenditures price index that the central bank favors as its primary inflation indicator.
With inflation largely in line with expert projections, the pressure will be on the central bank to cut its federal funds rate.
Betting markets believe Tuesday’s data release won’t have much of a negative impact on the chances of a September cut. CME FedWatch, which tracks the probability of changes to the Fed rate based on the 30-day Fed Funds futures prices, hovered around a 90% chance of a rate cut after the CPI release.
FedWatch is still betting on three rate cuts over the rest of 2025, with each cut being 25 basis points.
Another betting market is Polymarket, where users can use crypto to bet on real-world events. Polymarket’s website has a page where users can bet on how many cuts will occur in 2025. The leading choice is two cuts, with a 38% chance. Three cuts is second in the poll at 24%. One cut is third at 20%.
Users place an 88% chance that the Fed will cut rates at its next meeting in September.
Governors starting to dissent
In the latest meeting of the FOMC, two governors registered an official dissent: Michelle W. Bowman and Christopher J. Waller. It was the first time since 1993 that there were two dissenting opinions.
Bowman kept up her pressure on the rest of the Fed board on Saturday, when she called for three rate cuts over the rest of 2025. She cited a weakening labor market as a reason to act decisively.
“Taking action at last week’s meeting would have proactively hedged against the risk of a further erosion in labor market conditions and a further weakening in economic activity,” she said.
A combination of a weak jobs report and a key Federal Reserve resignation has made a September rate cut "almost certain."https://t.co/uCHQW3owaG
— Mortgage Professional America Magazine (@MPAMagazineUS) August 4, 2025
Bowman and Waller are among the names being discussed as the Trump administration decides who will be the next Fed chair, with Jerome Powell’s term ending in May 2026. The administration will likely choose someone who favors multiple rate cuts in 2026.
While Bloomberg reported last week that Waller was emerging as the favorite to lead the central bank next year, the Wall Street Journal mentioned several additional candidates, including St. Louis Fed president James Bullard, former Bush administration economic adviser Marc Sumerlin, National Economic Council director Kevin Hassett, and former Fed governor Kevin Warsh.
Meanwhile, Bloomberg reported on Monday that in addition to Bowman, Fed vice chair Philip Jefferson and Dallas Fed president Lorie Logan were being considered.
The full CPI report can be viewed on the Bureau of Labor Statistics’ website.
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