June CPI Shakes Up 2026 Rate Hike Odds

“Earnings don’t move the overall market; it’s the Federal Reserve Board. Focus on the central banks and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.” ~Stanley Druckenmiller

Stubborn Inflation Continues to Linger

Over the past 5 years, cumulative inflation is up a staggering 25% following the rampant stimulus and government spending synonymous with the COVID era. According to the Federal Reserve, the central bank’s target consumer price index (CPI) is 2%. However, since January 2020, CPI has been 4.0% annualized, and 13% above the 2% inflation trend.

Image Source: Charlie Bilello, Creative Planning

Latest CPI Reading is a Relief for Kevin Warsh

Two months ago, Kevin Warsh took the reins as U.S. Fed Chair Jerome Powell. President Trump’s Warsh selection was a surprise to many Wall Street analysts as he was seen as more “hawkish” than the other candidates he had interviewed. Since taking over, Warsh has promised to push a neutral, data-dependent central bank playbook. That said, prior to today’s CPI reading, it appeared that Warsh would be stuck between a rock and a hard place. Before Tuesday, the data suggested that a 2026 rate cut would be necessary due to the energy spike caused by the ongoing U.S.-Iran conflict. Worse yet, half of the FOMC voting members have been modeling potential rate hikes. Combine the troubling inflationary data with President Trump’s ongoing push for lower rates, and you can see why Warsh has a tough job.

However, Tuesday’s inflation reading was a relief for Warsh. June CPI inflation fell to 3.5% (below expectations of 3.8%). Meanwhile, month-over-month CPI inflation fell -0.4%, marking the largest monthly drop since 2020. A big part of the drop was falling energy prices. That said, dig deeper, and the under-the-hood numbers are far more bullish than the headline number. Shelter, which has been one of the stickiest inflationary components, gained only 0.1% (the smallest monthly increase in 5 years). Additionally, used car and truck prices dropped -0.6% YoY, marking six consecutive monthly drops. Finally, apparel prices dropped -0.6% month over month. In other words, today’s CPI data shows that cooling energy prices are not the only bullish inflationary inputs.

As a result, major market index ETFs, such as the Nasdaq 100 (QQQ) and S&P 500 ETF (SPY) gained ground Tuesday. Meanwhile, tech stocks such as SanDisk (SNDK), Micron (MU), and Dell (DELL) also gained ground.

Will the Fed Hike Rates in 2026?

According to betting markets, the chances of a rate hike in 2026 are about a coin flip (53% chance of a hike in 2026).

Image Source: Polymarket

Nevertheless, the recent movement in the PolyMarket Rate Hike market tells the story. Prior to Tuesday’s freezing-cold CPI number, the odds of a rate hike in 2026 were as high as 73%.

Bottom Line

June’s softer-than-expected CPI reading is a vital variable that keeps new Fed Chair Kevin Warsh from being forced to choke off market liquidity with aggressive rate hikes.

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This article originally published on Zacks Investment Research (zacks.com).

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