Fed Rate Hike Odds Surge to 90% After Inflation Spike
Market expectations for a Federal Reserve rate hike jumped to 90% following August inflation data that exceeded forecasts.
Fed funds futures now price a 90% probability of a quarter-point rate increase at the September 15-16 meeting. This marks a sharp reversal from last week, when a two-thirds majority of economists expected a hold.
The shift follows the release of August consumer price index data. Inflation rose 0.4% month-over-month, pushing the year-over-year rate to 3.4%. Core inflation, excluding food and energy, climbed 0.3%, beating analyst expectations by 0.1 percentage points.
Inflation data drives hawkish shift
Eighty-six of 101 economists in a Reuters poll now forecast the Fed will raise its benchmark rate to 3.75%-4.00%. This would be the first increase since July 2023. The strong producer price readings also suggested that core PCE inflation, the Fed's preferred gauge, accelerated in August.
Stephen Juneau, senior U.S. economist at Bank of America, noted that the data did not provide the softness needed for the Fed to avoid action. The inflation report was firmer than anticipated, forcing a rethink of the monetary policy path. This aligns with the broader market view reported by GN markets/inflation (en-US).
Oil prices and credibility stakes
Crude oil futures trading above $100 a barrel have added pressure on inflation expectations. Scott Anderson, chief U.S. economist at BMO Capital Markets, warned that the Fed must back up its hawkish rhetoric with action. He stated that failure to act risks a steeper Treasury yield curve.
Major institutions including Goldman Sachs, JPMorgan, HSBC, and Deutsche Bank have reversed their positions. Goldman Sachs had called a September increase very unlikely as recently as last month. The Friday CPI release pushed market odds to 90%, up from 72% the day before.
Further hikes likely by March
A near-majority of economists now expect at least one further rate increase by the end of March. Diane Swonk, chief economist at KPMG, described the anticipated Wednesday move as potentially just the start. She suggested that a quarter-point hike may be the opening move rather than the final one.
