The Federal Reserve's interest rate decision next week could be determined by just a few hundredths of a percentage point in inflation data. Policymakers are keenly awaiting the August producer and consumer price index releases, scheduled for Thursday and Friday, respectively, to guide their vote. A "hot" inflation report would likely argue for a rate hike, while signs of cooling inflation, particularly on a monthly basis, could lead the Federal Open Market Committee (FOMC) to hold rates steady. This fine-tuning approach is notable given Chairman Kevin Warsh's past criticisms of such precision.
Analysts are dissecting how these upcoming inflation reports will translate into the Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation measure, which will be released at the end of the month. Krishna Guha, head of economics and central bank policy at Evercore ISI, suggests that if core PCE (excluding food and energy) lands around 0.21% or 0.22%, the FOMC would likely favor a hold. However, an implied 0.23% or 0.24% could push for a rate hike. Economists surveyed by Dow Jones anticipate a monthly headline Producer Price Index increase of 0.4%, leading to an annual rate of 5.3%. For consumer prices, the consensus is a 0.4% monthly headline increase and a 0.2% core increase, with annual rates of 3.4% and 2.4% respectively.
The debate among Fed officials is evident, with some, like Cleveland Fed President Beth Hammack, pushing for hikes, while others, including Fed Governors Christopher Waller and Michael Barr, advocate for a more data-dependent approach. Waller explicitly stated that the August inflation report next week would largely determine his stance. The market currently sees a 60% probability of a rate increase, indicating low conviction. Furthermore, the PCE calculation method is set to undergo revisions at the end of the month, adding another layer of complexity for forecasters. Despite the granular focus, Guha's working hypothesis leans towards a hold, suggesting that inflation data is likely to be on the cooler side.
