The Federal Reserve is widely expected to implement a 25 basis point rate hike at its September 15-16 meeting following the release of stronger-than-expected inflation data. As per ING analysis, the Fed's decision reflects a recalibration rather than the start of a new tightening cycle, with Chair Kevin Warsh emphasizing a focus on inflation that has been above target for five and a half years. The central bank had previously signaled it would hold rates unless data justified a hike, but this approach has shifted to hiking unless the data justified a pause. Treasury Secretary Scott Bessent is likely in favor as he watches longer-dated Treasury yields climb, while even President Trump has seemingly given Warsh a pass, stating 'he'll do what he has to do.' The Fed is scheduled to announce its policy decision at 2 p.m. EDT (1800 GMT) after a two-day meeting, with financial markets pricing in a strong probability of a quarter-point increase in the benchmark rate to a 3.75%-4.00% range. The expected move would present a challenge for Warsh, who has led the Fed's rate-setting committee since taking charge in May, as President Trump appointed him with an expectation that he would lower borrowing costs.
U.S. consumer prices accelerated in August as gasoline costs rebounded after two consecutive monthly declines, with the core CPI rising 0.3% last month compared to economists' median forecast of 0.2%, according to Bloomberg survey data. The core CPI increased 2.4% year-on-year in August, up from 2.5% in July, as reported by the Bureau of Labor Statistics. The overall CPI increased 0.4% month-over-month and 3.4% year-over-year, meeting expectations from Reuters economists. The all items index rose 3.4 percent for the 12 months ending August, unchanged from July's reading and in line with forecasts. The policy outlook has shifted significantly over the past few weeks, with earlier September data showing cooler inflation readings in June and July as evidence that price pressures were moving gradually toward the central bank's 2% target. However, hotter-than-expected inflation data last week changed the backdrop, with core consumer prices, which exclude food and energy, increased 0.3% in August from the previous month, a pace that remains inconsistent with the Fed's inflation target. As per The Financial Express, the all items index rose 3.4 percent for the 12 months ending August, unchanged from July's reading and in line with forecasts. The report suggests inflation made little progress toward the Fed's goal amid ongoing pressures from the Iran war, tariffs and the data center buildout.
Oil prices have surged to exceed $100 per barrel, with Brent crude hitting a four-month high of $109.97 a barrel on Friday after a 6% jump the previous day, though it soon retreated about 3% to $104.28. The index for gasoline rose 3.9% in August, accounting for over one-third of the monthly all items increase, as reported by The Financial Express. The energy index increased 2.1% over the month, while the shelter index rose 0.3% in August after rising 0.1% in July. The index for food increased 0.1% over the month, as the index for food away from home increased 0.3%. The rise in crude prices has been driven in part by Washington's war with Iran, which has disrupted the global flow of fuel and put further pressure on consumers and businesses. Diesel prices in the US hit yet another record on Friday, soaring past $6 a gallon. Oil flows remained restricted through the Strait of Hormuz as the U.S. and Iran traded attacks, with prices falling after the Financial Times reported that foreign ministers in the Middle East were trying to work out a temporary deal to manage shipping. However, President Trump's comments that the conflict could last beyond the November midterm elections continue to support market pricing for protracted war risks. The inflation challenge has been compounded by a sharp rise in oil prices following renewed hostilities in the Middle East, with crude prices climbing above $100 a barrel, raising concerns that higher energy costs could prolong inflationary pressures.
Excluding volatile food and energy components, the core CPI rose 0.3% last month, marking the largest increase since April and above economists' expectations for a second straight month of 0.2% gain, according to Business Standard. Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, noted that "It wasn't as hot as yesterday's PPI, but today's CPI left the Fed with less room to maneuver as it tries to maintain its inflation-fighting credentials." The core CPI increased 2.4% year-on-year in August after rising 2.5% in July, driven by a 2.7% increase in airline fares amid rising jet fuel costs. There were also solid increases in education, communication, used cars and trucks, with rents rising 0.2% and hotel and motel room costs rebounding 2.4%. However, healthcare costs eased while prescription medication prices remained unchanged. With diesel prices at record highs, consumers could soon face higher prices at supermarkets as nearly all goods are transported by road, economists warned. Some saw price pressures persisting because of tariffs on imports, most recently against Canada, one of the United States' top trade partners. Sung Won Sohn, a finance and economics professor at Loyola Marymount University, noted that "Energy inflation does not stay at the gas station. It travels by truck, airplane and cargo ship into nearly every store in America."
Markets have dramatically increased bets on a Federal Reserve rate hike following the August inflation data, with Fed funds futures contracts now implying a 91% chance of a 25 basis point rate hike at the Fed's September 15-16 meeting, up from around 72% on Thursday, according to CME's FedWatch tool. The probability of a rate hike has climbed above 60%, up from 44.4% in early August, as reported by CME Group. A rate increase could also have political implications ahead of November's congressional elections, when Trump's Republican Party is defending narrow majorities in Congress. Warsh could face growing pressure to provide some indication of the likely path for interest rates if the Fed raises rates and policymakers' projections point to another increase later this year. According to Reuters, Warsh has repeatedly emphasized the Fed's responsibility for maintaining price stability, and his focus on inflation and financial market pricing could make it difficult for him to justify keeping rates unchanged when markets have already placed heavy odds on a hike. Some economists believe the chairman could still secure a majority for a pause, given that many policymakers may be reluctant to oppose the new Fed chief so early in his tenure. However, the latest inflation data, elevated oil prices and Warsh's own previous comments have strengthened expectations that the central bank will opt for a hike. Some commentators have argued that the Fed won't raise rates this week, since the midterm elections are fast approaching and a hike would anger the President. However, Investing.com analysis suggests that the Fed must stick to its mandate and ground its decisions in economics, not politics, citing historical data showing the Fed has changed rates in 43% of 60-day windows before elections versus 45% of all periods.
