"Jerome Powell's testimony and the FOMC Minutes released yesterday basically re-affirmed the Fed's party line that increased trade tensions, slowing global growth and low inflation are the drivers that are going to force them to begin a new rate cutting cycle later this month", says Erik Bregar, head of FX strategy at Exchange Bank of Canada.
The CPI reading pointed to firmer inflationary pressures after months of muted consumer price rises.
Powell went on to dismiss the suggestion that a strong June jobs report obviated the need for a rate cut, explaining that while the labor market is tight, wages have continued to lag in defiance of expectations.
"Many" Fed officials now believe a weakening global economy and rising trade tensions have strengthened the case for a rate cut, Powell wrote in a report released ahead of his appearance before Congress later on Wednesday.
Hopes that the Fed would step in to keep the economy humming have risen sharply since May when trade negotiations between the U.S. and China stalled.
But with unemployment at close to record lows and the United States economy showing continued strength, the Fed left rates unchanged at it's last meeting.
Following Mr Powell's comments, the dollar fell against a basket of currencies and the major share indexes opened higher. We can measure whether a rate cut is being priced-in by examining the difference in borrowing costs for commercial banks over a specific time horizon in the future. Traders should appreciate the idiosyncratic way interest rate markets are now discounting Fed rate cuts: the rate cuts are extremely frontloaded.
"The Fed has never disappointed a market with such strong expectations of action", Joseph Lavorgna, chief economist for the Americas at Natixis, wrote in a recent analysis. However, after he's spoken, there is now a 100% chance of a 25-bps rate cut, and a 28% chance of a 50-bps rate cut at the July Fed meeting.
This is a reversal of his previous plans that would steadily raise rates this year.
This was despite last week's strong U.S. jobs figures and an easing of trade tensions with China.
By contrast, the higher tariffs announced against China in early May, a fear that the world's two largest economies might not be able to make a deal, and the tariff threat against Mexico, all added to the growing feeling that protectionism and higher tariffs were here to stay - at significant cost to investment and growth.
"If there was any doubt that the data was really compelling, especially the strong USA nonfarm payrolls report last week, I think we had our answer yesterday, with Powell's pretty strong argument for easing as soon as July", said Mazen Issa, senior FX strategist at TD Securities in NY.
In his testimony on Wednesday, Powell pledging to "act as appropriate" to defend an economic expansion threatened by trade disputes and a global slowdown.