Why the Fed Isn’t Likely to Wait Until October
Rate-hike expectations climb after August CPI data.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
While some may use the phrase “and like magic” to describe the August CPI, up and down the report the headline and core figures came in largely as expected save for the warmer month-over-month print for the core CPI. The market had been expecting a 0.2% increase on that basis and instead the actual print came in at 0.3%.
Some no doubt will annualize that monthly figure and point out the resulting 3.6% figure, but a trailing three-month view is the one typically used by Fed officials. While that offers a much softer view, the reality is that on a sequential basis, core CPI has been heating back up with prospects for that to continue.
Source: Refinitiv
In response to the overall report, we are seeing the yield on the 10-year Treasury retreat from its move higher earlier this morning. Still at 4.92%, that yield is roughly a full point higher than where it was this time last year, and markedly higher than the 4.4% level near the end of June.
Even as the market breathes a sigh of relief because the bulk of the August CPI data didn’t come in above what was expected, the reality is the move we’ve seen thus far in September for oil and related energy prices, including diesel and gas, are pressures that will flow through the economy and upcoming inflation data.
A quick check of the CME FedWatch Tool shows a gap up in the probability the Fed delivers a 25-basis point rate hike next week to 85.8% from 72.4% yesterday and just under 60% last week.
The question now is whether the Fed will deliver what the market expects next week, or will it stand to the side and let higher Treasury yields do the job rather than deliver a rate hike ahead of the midterm elections?
Given the preponderance of data points, it’s hard to not see the Fed delivering a 25-basis point rate hike, hence the probabilities depicted in the CME FedWatch Tool. While the market would cheer another pause in monetary policy, it would also call into question Kevin Warsh’s credibility as Fed Chair following his Jackson Hole comments and others from him that, on his watch, monetary policy doesn’t rest on any one data point.
There is also another Fed policy meeting in October, but that is even closer to the midterm elections. And by and large, expectations are the Iran war will run through the midterms and potentially longer.
Putting it all together, we’re in the camp that the Fed will deliver a rate hike next week and then likely signal that should upcoming inflation data remain sticky or trend higher, it is prepared to do more. But that means the market’s focus will be on the Fed’s December monetary policy meeting, not the October one.
