Pressure persists on Fed Chair Powell and the Federal Reserve. The focus is on the interest rates, which are thought to be at least three points too high.
The comments aimed at Powell also reach other Fed members. If these ideas gain traction among them, the bias may change.
Focus On Inflation Data
Much of the outcome will hinge on inflation data. Powell anticipates inflation to rise in June, July, and August.
June’s inflation numbers will be available shortly. July’s Consumer Price Index will be out on July 15, followed by the Producer Price Index on July 16.
With the June inflation figures about to surface, we find ourselves expecting modest bumps over the next few months. Powell has already set expectations in this direction, which means that any rise which falls below the implied benchmark could prompt traders to consider a more favourable path for rates. Markets have largely priced in Powell’s outlook—that is, a temporary uptick—so any deviation, either steeper or gentler, will likely be received with sharp price adjustments in futures contracts.
Monetary Policy Expectations
What the previous section makes clear is that monetary policy may not yet be on a fixed course. While short-end yields reflect a notion that inflation has not yet firmly met the central bank’s mark, too steep a climb in CPI or PPI figures would confirm that view further. Without confirmation, however, some FOMC members may quietly shift their stance. That shift, if it occurs, tends to be noticed less through official channels and more through subtle changes in language—speeches, minutes, or even answers given during informal appearances.
Waller and others on the Board are known for revealing voicing shifts sooner than others. If inflation data appears more benign than Powell’s baseline, even for a single month, someone like Waller could frame it as persuasive evidence to reconsider further tightening—or at least to justify a pause.
In our view, this makes options pricing unusually sensitive. Risk reversal skews may begin to lean back towards calls, particularly in the 2- to 6-month zone. This may reflect growing confidence in a more tempered policy response if inflation does not follow through. Any hedging of upside risks in rates should take this period seriously.
The key set of dates for us remain unchanged. July 15 will show how headline consumer prices progressed, while the next day will give a read on input costs within the broader economy. These two figures—if diverging—might inject added volatility, as one portrays real-world pricing and the other influences manufacturing and supply chains.
Beyond that, swap spreads and Fed Funds futures should be monitored during the 48 hours surrounding both prints. Historically, we’ve seen that even a mild surprise can cause a meaningful repricing across the curve, especially in the short-dated instruments. Given Powell’s forecast, traders should reassess deltas and gammas in anticipation of this window.
Keep close attention to embedded expectations in the Eurodollar strips and SOFR FRAs leading into the data. The tension between market belief and policymaker guidance suggests that the repricing may start with modest volume and then accelerate quickly. This makes entry points ahead of CPI riskier but potentially more rewarding, provided exposure is actively hedged before the release.
In essence, traders would do best to avoid resting on past tendencies. The market’s stance still reflects doubt, and a single month’s surprise—up or down—could light a wider discussion among the Fed. They won’t say it loudly at first. But we’ll see it in how they stop saying some things, and choose different words.
