One meeting, two readings

Two days before the decision, the public appeal and the scenario the market prices point in opposite directions. On Monday the president said rates should be lowered; he praised Fed Chair Kevin Warsh while accusing some officials who oppose cuts of acting very politically. On the same day futures pricing showed roughly 68.5 percent of traders expecting the rate to stay in its 3.50-3.75 percent range and about one in three expecting a quarter-point increase. The risk the market prices runs upward.[1]

The distribution itself carries information. A two-thirds weight on no change says the outcome of the July 28-29 meeting is largely anticipated; the information sits in the remaining third. That much weight on a quarter-point increase at a single meeting says participants have not converged on a view about where inflation is heading.[1]

Which line actually moves the pricing

The June data show where that distribution comes from. Consumer prices fell 0.4 percent on the month, the annual rate eased to 3.5 percent from 4.2 percent in May, and core inflation came down to 2.6 percent. The line carrying the 0.9-point gap between headline and core is identifiable: fuel costs were up 15.7 percent from a year earlier.[1]

The source of that line got cheaper on Monday. Brent fell 9.13 percent to $87.94 a barrel and WTI 7.94 percent to $82.22, and a week earlier prices had approached $102. A decline in crude takes weeks to reach the pump and from there the consumer basket, so it will not arrive in time for Wednesday's decision. The inference: what sustains the quarter-point increase probability is the fuel-driven part of headline inflation, and the decline in that line has not yet entered the data. An alternative reading is available — the new chair's narrowing of forward guidance may have widened the distribution of participants' expectations independently of any single data line.[1], [2]

The next two prints

None of this yields a directional call, but it does yield a threshold worth watching. If crude holds near its late-July levels, fuel's contribution to annual inflation should narrow in the July and August prints. If it does not narrow, another line is carrying the gap between headline and core, and that would explain why the distribution has not closed.[1], [2]