Fed's Rate Hike Expectations Rise in the US Following Inflation and Employment Data
In light of strong macroeconomic data and statements from Fed Chair Kevin Warsh, the probability of a rate hike at the FOMC meeting on September 15-16 has gained strength in the markets.
Following strong inflation and employment data released in the US and hawkish messages from Fed Chair Kevin Warsh, expectations for a 25 basis point rate hike at the FOMC meeting on September 15-16 have peaked.
Expectations Ahead of the FOMC Meeting
The US Federal Reserve (Fed) will hold the Federal Open Market Committee (FOMC) meeting on September 15-16, which will determine the direction of global markets. Strong macroeconomic data released ahead of the meeting and hawkish messages from Fed Chair Kevin Warsh have driven expectations for a 25 basis point rate hike to a peak.
Course of Inflation and Employment Data
The two key data points determining the interest rate decision, inflation and employment, showed that the US economy continues to run hot. Nonfarm payrolls increased by 162,000 in August, exceeding expectations, while the unemployment rate remained steady at 4.1%. Additionally, upward revisions totaling 55,000 jobs were made to the data for June and July.
The Consumer Price Index (CPI) rose by an annual 3.4% in August, and the Producer Price Index (PPI) increased by an annual 5.4%, both coming in above expectations. The core inflation also increasing by 0.3% monthly proved that pricing pressures persist.
Disagreements Within the Fed
Fed Chair Kevin Warsh had signaled in his speech at Jackson Hole last month that additional steps could be taken if the inflation target is not met. Emphasizing that price stability is the primary focus, Warsh demonstrated his determination.
At the committee meeting in July, where interest rates were held steady at the 3.50-3.75% range, 3 members voted in favor of a hike. While members like Beth Hammack and Susan Collins supported a rate increase, Christopher Waller argued that rates could be kept on hold if signs of disinflation continue.
Experts' Market Assessments
Evaluating the data and the Fed's forward guidance, experts agree that the tightening cycle will continue. While Padhraic Garvey stated that markets are pricing in an 85% probability of a rate hike, Steven Kamin pointed to the robust labor market and inflation above target, emphasizing that a hike is highly likely.