A Fed gauge of wage growth is due to be updated on Friday, followed by a June reading on consumer inflation next Tuesday
Data on wage growth this week will be crucial for traders trying to gauge the potential for Fed rate hikes.
Tumbling oil prices may not be enough to prevent the Federal Reserve from hiking interest rates this year.
The $30 trillion Treasury market has been on edge ever since Fed Chair Kevin Warsh began talking tough about the need to get inflation back down to 2%.
The U.S.-Iran cease-fire extension in June helped ease some jitters, as more oil flowed out of the Persian Gulf and crude prices (CL00) fell back to about $70 a barrel. But it might take more than that for Fed officials to fully abandon the hikes penciled in at their June meeting.
"Every meeting should be considered live with inflation this far from target," Mike Lorizio, head of U.S. rates and mortgage trading at Manulife Investment Management, said on Tuesday.
That puts the immediate focus on the Atlanta Fed's Wage Growth Tracker, which is set to be updated on Friday. It currently reflects a three-month moving average of 3.5% growth. While the bull market in stocks SPX has fed off strong corporate earnings growth this year, inflation has been rising faster than wages for many workers.
"So far, we've seen no pressure on wages by any measure," Lorizio said, but any uptick could serve as the final push for Fed officials to green-light rate increases. "If you are truly worried about demand-driven inflationary pressures, that's where you'd look to see it first."
The Fed's main inflation gauge hit a 4.1% annual rate in May, while the "core" personal consumption expenditures rate, which strips out volatile energy prices, moved up to 3.4%. Both are uncomfortably high for the Fed. A fresh consumer inflation reading for June that's due next Tuesday is expected to reflect lower oil prices.
Yet inflation anxiety and possible Fed rate hikes have kept the policy-sensitive 2-year Treasury yield BX: TMUBMUSD02Y elevated at 4.14% on Tuesday, as the below chart shows.
The 2-year yield has been stuck well above the 3.75% upper limit of the Fed's own policy range, suggesting that traders aren't ruling out the possibility of rate hikes yet.
"They are, I think, willing to move if they have to," James Bullard, a former president of the St. Louis Fed, said about Fed rate hikes during a CNBC interview on Monday.
While July might be too soon for a rate increase, according to Bullard, he thinks a "tightening cycle" could be afoot starting in September, meaning more than one single hike. Easing oil prices and any future artificial-intelligence productivity gains likely won't be enough to "fix the inflation problem," he said.
Alex Pelle, senior U.S. economist at Mizuho Securities, warned that by the time inflation starts showing up in wages, it will already be too late for the central bank. Rising costs of electronic equipment, particularly in memory, could also risk "bleeding into a broader set of consumer goods," he said in a Monday client note.
Still, nothing is set in stone when it comes to inflation and the Fed's path for interest rates.
"The reality is, we've taken a lot of the heat out of the energy markets," said Jason Vaillancourt, chief portfolio strategist for Columbia Threadneedle Investments, pointing to the "fragile truce" between the U.S. and Iran since June.
Inflation also has gotten some breathing room from sluggish wages and U.S. home prices. "Those are three powerful sources of disinflation," Vaillancourt said.
Furthermore, it's too early to sound the "all-clear" on job displacement for white-collar workers due to AI, according to Vaillancourt. Fed officials won't want to get "suckered into doing something at the wrong time," he said.
The Dow Jones Industrial Average DJIA hit pause on a rally to record highs on Tuesday, and the S&P 500 and Nasdaq composite COMP were also lower, as semiconductor SOX and memory DRAM stocks dropped.
-Joy Wiltermuth
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(END) Dow Jones Newswires
July 07, 2026 13:53 ET (17:53 GMT)
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