The August Consumer Price Index (CPI) report, scheduled for release on September 11, has emerged as the pivotal factor for the Federal Reserve's September 15-16 interest rate decision. Following hawkish remarks from Fed Chair Kevin Warsh at the Jackson Hole symposium, markets have significantly increased the probability of a September rate hike, now pricing it at close to 70%. Warsh indicated that policy still has room to tighten, and Governor Christopher Waller has also previously stated that several months of lower inflation numbers are needed to confirm inflation is moving in the right direction. The upcoming CPI data will either solidify this expectation or reopen the debate.
Bank of America analysts echoed this sentiment, calling the CPI the "main course" for the Fed's decision, while the non-farm payroll report is considered merely an "appetizer." Unless there's a substantial negative surprise in the non-farm data, it's unlikely to be the decisive factor. This underscores the Fed's current primary focus on price stability over full employment, particularly given persistent inflation pressures driven by factors like higher energy costs and increased demand from the artificial intelligence boom.
The market's reaction to Warsh's speech was immediate, with the implied probability of a September rate hike rising from around 35% to over 50%, and subsequently to nearly 70%. The two-year U.S. Treasury yield, highly sensitive to Fed policy, rose by 11.00 basis points to 4.3480%, reaching its highest weekly close since January last year. Analysts at Barclays and Societe Generale, as well as Evercore ISI, have increased their expectations for a quarter-point hike in September, potentially followed by another in December. However, some, like Morgan Stanley and JPMorgan, remain skeptical about a September hike.
Adding to the complexity, the August CPI release will occur during the Fed's "blackout period," which begins on September 5, restricting monetary policy commentary. This means that if the CPI presents a "downside surprise," market participants will be left to interpret the implications without immediate official guidance. The broad consensus among economists and financial institutions is that a "hot" August CPI would strongly support a rate hike, while a "soft" one would reduce its likelihood, making the report the ultimate arbiter of the September decision.
