U.S. inflation may have opened the door for the Federal Reserve to temper the pace of coming interest rate hikes. But policymakers left no doubt they will continue to tighten monetary policy until price pressures are fully broken. A report Wednesday showing consumer prices didn't rise at all in July compared with June was just one step in what policymakers said would be a long process.

San Francisco Fed President Mary Daly warns it is far too early for the U.S. central bank to "declare victory" in its fight against inflation. Daly said that a half-percentage point rate rise was "baseline" but did not rule out a third consecutive 0.75% point rise.

Chicago Fed President Charles Evans says he believes the Fed will likely need to lift its policy rate to 3.25%-3.5% this year. He said the CPI report marks the first "positive" reading on inflation since the Fed began raising interest rates in March. After Wednesday's CPI report, futures tied to the Fed's benchmark interest rate pared bets on a third straight 75-basis-point hike.

The consumer price index rose 8.5% in July from a year earlier. While that marked a drop from June's 9.1% rate, prices are still rising at levels not seen since the 1970s and early 1980s. For the Fed to scale back, fresh inflation data will need to confirm the idea that price increases are slowing.

Food prices in July were up 11% from the year before, devastating for lower income families in particular. "The Fed needs a lot more evidence (of slowing inflation)... but this is a good start," said Karim Basta, chief economist with III Capital Management. Data on August consumer inflation will be released on Sept. 13.
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