97% Chance of No Interest Rate Hike Despite Disappointing CPI Print

After digesting the latest inflation figures, traders largely believe the Federal Reserve might pause its rate-setting policy. According to the CME FedWatch Tool, the probability of a pause stood at 97% after the data were released, which showed the consumer price index rose 0.6% in August, its biggest monthly gain of 2023.

Core Inflation Increased for the First Time in Six Months

In August, inflation experienced its biggest monthly increase so far this year. The US Department of Labor reported that the consumer price index rose a seasonally adjusted 0.6% for the month and was up 3.7% from a year ago. Economists surveyed by Dow Jones had expected respective increases of 0.6% and 3.6%. In July, the numbers were up 0.2% and 3.2%.

However, when excluding volatile food and energy prices, the core CPI increased by 0.3% and 4.3%, respectively, surpassing 0.2% and 4.3% estimates. Federal Reserve officials pay more attention to the core CPI as it better indicates long-term inflation trends. In July, core inflation was up 0.2% and 4.7%.

The increase in energy prices played a significant role, rising by 5.6% in the month, including a surge of 10.6% in gasoline prices. Meanwhile, food prices rose by 0.2%, and shelter costs, which comprise approximately one-third of the CPI weighting, climbed by 0.3%.

Within the shelter category, the rent of primary residence index rose by 0.5% and increased by 7.8% from a year ago. Owners equivalent rent, a critical measure that reflects what homeowners believe they could earn in rent, increased by 0.4% and 7.3%, respectively.

“The core CPI is a bit disappointing,” Kathy Bostjancic, chief economist at Nationwide Life Insurance, told Bloomberg. “This will keep the Fed on a hawkish alert and suggests a rate hike is possible in November and December.”

Investors Are Not Certain About Another Rate Hike

Last month, Federal Reserve Chair Jerome Powell said inflation remained too high, claiming central bankers were prepared to tighten policy further if necessary.

However, investors are uncertain about the likelihood of another hike. They believe the Fed will leave rates unchanged at its September 19-20 policy meeting. The futures market also indicates a lower chance of an increase in November. Rubeela Farooqi, chief US economist at High Frequency Economics, said:

“These data are supportive of a pause in September. However, the FOMC is not likely to declare victory until it sees further evidence of improvement towards the 2% target. They will remain open to further rate hikes if needed.”

The release of the CPI report did not significantly impact market expectations, as the probability of no rate hike in September had been anticipated for some time. Treasury yields remained unchanged after the report, indicating that investors’ view of the rate path had not been significantly altered.

While core inflation may soften in September, Omair Sharif, president of Inflation Insights LLC, said that a step-up in the core rate in the fourth quarter could prompt the Fed to raise rates again at the December meeting.

The policy-setting FOMC has raised its benchmark federal funds rate 11 times since March 2022. This has brought the benchmark rate to a range of 5.25% to 5.5%, a 22-year high.

Officials, including Powell, have emphasized that as they approach the end of their aggressive rate-hike cycle, they will proceed cautiously and rely on data to determine whether further increases are necessary.

Nevertheless, leading US stock market indexes, including the Dow Jones Industrial Average, the Standard & Poor’s 500, and the Nasdaq Composite, are up this year, each gaining 4.3%, 16.82%, and 32.99% YTD, respectively.

This article originally appeared on The Tokenist

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