CPI cools off, and the market celebrates wildly—then Waller pours a bucket of ice water on it: the knife of rate hikes in the second half hasn’t even landed yet

On July 14, global financial markets put on a “celebrate first, then calm down” reversal drama.
The U.S. June CPI data came in at a year-over-year 3.5% and a month-over-month -0.4%, both broadly beating expectations, instantly igniting long risk-asset sentiment—the price of Bitcoin surged to around the $65,000 level, gold jumped more than $50 in a single day, U.S. Treasury yields collectively plunged, and traders even cut the odds of a July rate hike from nearly half to under 20% overnight.
Just as the market collectively popped champagne and shouted “the rate-hike cycle is over,” statements from Federal Reserve Chair Waller at a congressional hearing gave everyone a bone-chilling splash of cold water.

I. An unexpectedly strong CPI: first month-over-month contraction in six years

First, take a look at the CPI results that the market treated as a “major positive.”
According to data from the U.S. Bureau of Labor Statistics, June unadjusted CPI rose 3.5% year over year, far below market expectations of 3.8%, down 0.7 percentage points from the prior 4.2%; seasonally adjusted CPI fell 0.4% month over month, not only far better than the expected -0.1%, but also the first time since the 2020 pandemic that it showed month-over-month negative growth, setting a six-year low.

Breaking down the components, the biggest contributor to the cooling was a sharp drop in energy prices. In June, energy CPI fell 5.7% month over month. Among it, gasoline prices dropped 9.7% in one month, dragging overall CPI down by 0.43 percentage points month over month, nearly explaining the entire month-over-month decline.
Excluding food and energy, core CPI also looked moderate: it rose 2.6% year over year, below the expected 2.8%; month over month it was 0%, the smallest increase since 2021. Core goods prices posted two consecutive months of declines month over month. Clothing, used-car prices, and motor vehicle insurance premiums generally fell. Even housing inflation—which had previously been the most stubborn—also showed some marginal cooling.

Judging purely from the numbers, inflation seems to be charging toward the Fed’s 2% goal, and this is also the key logic behind the market’s sudden shift.

II. Extreme repricing by the market: rate-hike expectations flip overnight

In the hours after the data release, the market completed an extreme adjustment to expectations.
The crypto market was hit first. Bitcoin quickly rallied in the short term, with an intraday high approaching $64,800, and a 24-hour gain of more than 3.6%. Ethereum was even stronger, with the single-day increase breaking 5%, and overall risk appetite rebounded across the board.
Traditional markets also got jittery: spot gold surged more than $100 intraday and briefly broke above $4,100 per ounce; the 2-year U.S. Treasury yield, the most sensitive to interest rates, fell by 14 basis points intraday, the biggest single-day drop of the year; the U.S. dollar index plunged nearly 50 points, and all three major U.S. stock index futures rose.

The most direct sign was the flip in rate-hike expectations. According to the CME FedWatch tool, the probability of a July Fed rate hike was close to 46% before the data release; after the data came out, it quickly dropped to around 15%. The market effectively passed a “death sentence” on a July rate hike and even started discussing the timing window for a potential rate cut.

III. Waller pours cold water: one month of data doesn’t count as victory

Just as market sentiment was pushed to the peak, Waller at the House Financial Services Committee hearing shattered the optimistic expectations with the most straightforward words.
“Some people might say the job is done. I don’t see it that way.”
“I’m not satisfied with any inflation measure.”
These two statements directly hit the pause button on the market’s celebration. Waller clearly pointed out that the Fed has failed to achieve the 2% inflation target for 63 straight months. In his view, inflation has remained above the target line for the past five years, and that, in itself, is a lapse of duty by the Fed.

In his logic, improved single-month data is not enough to prove a victory in a sustained trend. The June CPI decline largely depended on a temporary drop in energy prices, and energy is extremely volatile and does not provide consistent guidance. More importantly, core inflation is still at 2.6% year over year, leaving a clear gap versus the 2% statutory target, meaning inflation persistence has not been fully eliminated.
At the Senate hearing the next day, Waller reiterated the stance: the Fed will review all policy tools—including interest rates and the balance sheet—to judge whether adjustments are needed to respond to inflation. The “zero tolerance” position on fighting inflation has not wavered at all.

IV. The “inflation illusion” behind the pretty data

In fact, this seemingly perfect CPI report itself contains a considerable amount of “illusion.”
The energy prices that drove CPI sharply lower are, in essence, a short-term drop brought by the phased easing of conflict between Iran and the U.S. Since July, Middle East geopolitical tensions have seen further twists, and oil prices already show signs of a rebound. Once energy prices rise again, the downward slope of CPI would immediately narrow, or even turn upward again.

On the other hand, although core inflation cooled more than expected, the stickiness in services inflation remains. The year-over-year housing component is still hovering at a high 3.3%, and the labor market’s tight balance will also support wage growth, thereby propping up inflation from the demand side.
This also means June’s inflation drop looks more like a “breather from the supply side” rather than a complete release of inflation pressure. When the market treats one month’s data as a trend inflection point, there is a risk of excessive pricing.

V. Implications for crypto: after the celebration, beware of expectations reversing

Back in crypto, this CPI-driven rebound is more like a valuation repair caused by expectation correction, rather than the start of a sustained trend.
Waller’s remarks have made the signal clear: the Fed will not give up its hawkish stance just because of a single month’s data. The knife of rate hikes in the second half is only temporarily hanging, not fully taken back. There is still a window in September and October. If subsequent inflation data shows any reversal, market expectations will quickly pivot again.

For investors, rather than chasing gains in the celebration, it’s better to calmly assess the structure and risks behind the data. The battle against inflation is far from over, and the shift in monetary policy is likely to be far longer than many imagine. In this phase where expectations swing back and forth, managing position size and staying wary of emotional chasing may be the safer choice.