US stocks rise as Fed signals more rate hikes ahead of Wednesday CPI data

Wall Street opened Tuesday with a cautious optimism, stocks climbing as traders absorbed conflicting signals about the path forward for interest rates. The day before, two prominent Federal Reserve officials had made their positions clear: rates would need to keep rising. Mary Daly, president of the Federal Reserve Bank of San Francisco, said during remarks at the Brookings Institution that "a couple more" increases would probably be necessary to bring inflation down to the Fed's target of 2%. Loretta Mester, who leads the Cleveland Fed, went further—she suggested that if the decision had been hers alone at the June meeting, she would have voted to raise rates then, rather than pause as the committee chose to do.

The market's reaction was mixed but ultimately positive. Investors were trying to square two uncomfortable truths: the Fed was signaling it wasn't done tightening, yet the very fact that officials were talking about this openly suggested confidence that inflation was moving in the right direction. The pause in June had been a signal of caution, a moment to assess. Now the Fed was saying the work wasn't finished.

What everyone was really waiting for, though, was Wednesday's inflation report. The June consumer price index would land midweek, and traders were hungry for evidence that price pressures were finally easing. Tom Lee, an analyst at Fundstrat, had made a bold call on Monday: he initiated a short-term buy recommendation for the S&P 500, predicting the index would climb to 4,500 by week's end if the CPI data came in cooler than expected. It was the kind of specific, high-conviction call that only gets made when someone believes the data will cooperate.

By mid-morning Tuesday, the major indexes were in the green. The market was pricing in a scenario where inflation continued its slow retreat, giving the Fed room to raise rates without crushing the economy. It was a delicate balance—the Fed needed to keep fighting inflation without triggering a recession. The stock market's climb suggested traders believed that balance was still possible.

Commodities moved in their own directions. Oil prices edged higher, with West Texas Intermediate crude rising 1% to $73.76 a barrel and Brent, the international benchmark, climbing 1% to $78.44. Gold ticked up 0.4% to $1,938.50 an ounce. Bitcoin barely moved, inching up less than 1% to $30,417. The 10-year Treasury yield dipped two basis points to 3.978%, a small signal that bond traders were pricing in a scenario where the Fed's rate-hiking cycle might be nearing its end.

The real test would come Wednesday morning. If inflation had cooled as expected, the market's bet would pay off. If it hadn't, traders would have to reckon with the possibility that the Fed meant what it was saying—that more pain was coming. Either way, the week ahead would reshape expectations for the second half of the year. And then, on Friday, earnings season would begin in earnest, with the big banks reporting their quarterly results. By then, the market would have a clearer picture of what inflation was doing and what the Fed intended to do about it.