The Fed may be done. Indeed, the market suspects the Fed is done.

July’s CPI report was favorable for the disinflation narrative, particularly when you consider the unrounded MoM core prints. Not since February of 2021 has the US enjoyed a slower month-to-month pace of core price growth.

Of course, everyday people care more about headline prices than core given how much Americans enjoy eating and using energy. The country has a horrible obesity problem and uses more energy per capita than almost any nation on Earth.

On Thursday, Mohamed El-Erian warned on recent gains for commodity prices, which he suggested could imperil the Goldilocks narrative. “Absent a reversal of the notable increase in the prices of energy and certain foodstuffs in recent months, it’s just a matter of time until the pass-through effects are felt in the prices of a wider set of goods and services,” he wrote, in an opinion piece for Bloomberg.

It’s true: Commodity prices have rebounded. Oil traded at a YTD high this week, European natural gas surged+ the most since Russia invaded Ukraine and there’s every reason to believe that conflict will get worse before it gets better (if it ever gets better). Some now see considerable scope for commodities to inflect.

Still, it’s hard to escape the notion that the Fed’s finished raising rates. There’s plenty of scope for credit tightening to serve as a drag on growth in the US, the labor market has just barely begun to soften and the real funds rate is at least positive, even if we can debate whether it’s restrictive (“sufficiently” or otherwise) in the context of the r-star discussion.

As the Fed was reminded in 2022, there isn’t anything they can do to control commodity prices. Sure, you can dynamite demand and hope that helps at the margins, but people have to eat and use energy, albeit not as much as Americans do. You can’t “destroy” all of that demand. Besides, higher energy costs could curb inflation elsewhere in the economy.

“There has been some talk that the rise in energy costs will make the Fed more inclined to hike rates since it will push up inflation with rising costs potentially passed onto other components such as logistics and airline fares,” ING’s James Knightley remarked. “We are not that concerned though since it can have a disinflationary effect because higher energy prices can be viewed similarly to a tax.”

The market now sees virtually no chance (~10%) of a hike next month, and just a one in three shot that the Fed will hike again at all.

Frankly, it may be more likely that the Fed cuts in December than hikes in November. Laugh as you will, but the policy calculus can change very quickly, and four months is a long time.

“[The CPI report] supports our view that the Fed is done with interest rate increases, as we continue to expect inflation and labor market conditions to soften in the coming months,” TD’s Oscar Munoz and Molly McGown said Thursday. “We look for the Fed to cut 300bps in 2024 given our expectation of a harder landing and a recession in Q1.”

Commenting in the wake of Thursday’s data, BMO’s Ian Lyngen was blunt. “Overall, there is nothing within this release that would support a Fed hike next month,” he said. “September will be a skip.”