Markets View September Rate Hike As More Likely Than Not

Inflation Nowcast

The Cleveland Federal Reserve’s CPI Nowcast potentially has August inflation coming in hot, at a headline rate of 0.4% month over month, perhaps due in part to rebounding energy prices from July’s dip.

If that forecast holds, it may nudge policymakers toward raising rates. Of course, monetary decisions do not hinge on a single data point, but in the context of other data a hot August inflation reading, should it occur, may be sufficient to prompt higher rates.

Recent Fed Signals

Chair Kevin Warsh’s Jackson Hole speech was perceived as a little hawkish, maybe suggesting that an interest rate hike could come soon. When discussing inflation, Warsh said, “But on the price-stability side of our mandate, the numbers are more concerning. The Fed’s preferred measure of inflation, the 12-month change in the PCE price index, stands at 3.7 percent, while the six-month change is 4.1 percent. The comparable measures from the consumer price index (CPI) are also elevated, as are the core measures of both PCE and CPI inflation. None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target. So the Fed’s predominant focus right now should be on prices.”

Since then, a speech from Fed Governor Christopher Waller took more of the other side, suggesting that disinflation could be playing out. Waller said in a speech on Sept. 3 that, “While inflation remains meaningfully above the Federal Open Market Committee’s (FOMC) 2 percent goal, recent data suggest we are finally seeing some signs of disinflation. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting. But there continues to be considerable uncertainty about how military conflicts, trade policy, and artificial intelligence (AI) will affect prices and economic activity. If the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.”

Three Votes For A July Hike

It is clear the FOMC is concerned about inflation. Of the 12 voting members at the late July meeting, three voted to raise interest rates. Of course, they were in the minority, so rates were held steady.

These votes for higher rates were from Beth Hammack, Neel Kashkari and Lorie Logan. It’s unclear that economic data since July will change the minds of these policymakers on the need for higher interest rates. If so, the question is: Will at least four of the remaining nine voting members join them in voting for higher rates?

What To Expect

It appears a rate hike this month is now more likely than not. However, much will depend on August’s CPI report. Nowcasts suggest that CPI reading may be elevated. If so, the chance of a September hike could edge up further. If a September hike doesn’t occur, then for now, markets still view an October or December hike as likely.