The Fed wants to see inflation consistently below 3% so it can have the confidence to cut interest rates. But Powell said the Fed will not wait until inflation reaches its 2% target before cutting rates. In addition, recent economic data has also fueled the argument that the Fed should cut rates sooner rather than later.

The Fed's preferred inflation measure, core PCE, showed a year-on-year increase of 2.6% in May, in line with expectations and the slowest annual increase in more than three years. On Friday, data from the Bureau of Labor Statistics showed that the unemployment rate unexpectedly rose to 4.1%, the highest level in nearly three years.

Bank of America said, "If the CPI report is in line with our expectations, we will maintain our expectation that the Fed will start a rate cut cycle in December." Nevertheless, the bank also acknowledged that the core CPI growth rate remaining at 0.2% month-on-month will increase the risk of an early rate cut, especially given signs of weak economic activity.

Investors now expect the Fed to deliver one or two 25 basis point rate cuts this year, down from six expected at the start of the year, according to Bloomberg data. As of Wednesday, the market priced in about a 75% chance that the Fed will start cutting rates at its September meeting, according to CME Group.

Financial blog Zero Hedge believes that today's CPI data will almost certainly be in line with or slightly below expectations, as Nick Timiraos, a reporter known as the "New Fed News Agency," published two September rate cut notices within 24 hours. This means that even if the Fed may not cut interest rates at the July FOMC meeting, it may very clearly hint at a September rate cut.

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