Investors See a 69% Chance of a Fed Hold as US Inflation Cools, Lifting Gold

U.S. inflation data for July came in weaker than expected, as the Consumer Price Index slowed while the Producer Price Index held flat on a monthly basis, below expectations for an increase, on declining energy and food costs, with annual producer inflation easing to 4.7% from 5.5% in June even as core readings stayed firmer than expected. Following the data, the CME FedWatch tool showed that markets are pricing in a 69% probability of the U.S. Federal Reserve keeping interest rates unchanged at its September meeting, compared to 31% who still expect a new rate hike.

The shift in expectations was reflected in gold, which found support from declining monetary tightening bets, as keeping interest rates unchanged reduces the opportunity cost of holding the non-yielding metal. Market attention remains focused on upcoming statements from Fed officials to confirm this trend ahead of the meeting.

A glossary for the non-specialist reader:

Consumer Price Index (CPI): a gauge that tracks the prices of goods and services people buy every day, such as food, fuel and rent. When it slows, inflation is cooling.

Producer Price Index (PPI): measures the prices factories and companies charge before goods reach the consumer, making it an early warning signal for inflation, since what happens there today often reaches consumers months later. Core readings strip out food and energy, whose prices swing sharply, to show the true underlying trend.

Holding vs hiking rates: the Federal Reserve is the US central bank. It raises interest rates to fight inflation, because higher rates make borrowing more expensive and cool spending, and it holds them steady once it is confident prices are calming down.

CME FedWatch tool: a tool that calculates the market's expectations for the Fed's decision from the prices of interest rate futures contracts traded by investors with real money, so it reflects actual bets rather than an opinion poll.

Why 69% and 31%? Because the market sees only two likely outcomes for the September meeting, a hold or a hike, and their probabilities must add up to 100%. Futures prices currently imply a 69% chance of a hold and a 31% chance of a hike. Before the latest inflation data, the hold probability was only around 45%, meaning the cool readings clearly shifted bets toward a hold.

Where gold fits in: gold pays no interest, so when the odds of higher rates fall, investors give up less by holding gold instead of bonds or deposits, and demand for it rises.