Odds of a Federal Reserve rate increase were already high. The latest inflation data cemented them even more. The consumer price index in August rose 0.4% month over month and 3.4% year over year, according to the Bureau of Labor Statistics. Those numbers matched consensus estimates from Dow Jones. However, core inflation — which strips out volatile food and energy prices — rose 0.3% month over month. That’s 0.1 percentage point above the estimate. The Federal Reserve’s inflation objective is 2% annually. Friday’s slightly hotter-than-expected core print was enough to raise chances of a quarter-point Fed rate increase next week to nearly 86%, up from 72% on Thursday, according to the CME Group’s FedWatch tool. That’s not reflected in equities. The major U.S. stock averages rallied Friday as oil prices gave back some of the recent, sharp gains made this week. Expectations for a Fed rate increase were evident in the bond market, however, as the 2-year Treasury yield rose to levels not seen in more than two years. Here’s what some investors, economists and strategists on Wall Street said about the report: Ian Lyngen, head of U.S. rates at BMO Capital Markets: “Overall, the report clears the path for the FOMC to hike next week — a move that we expect will be followed by at least an additional quarter-point by year end. Futures are pricing in ~90% odds of a hike on Wednesday. The price action in the Treasury market has been remarkably muted, all things considered. The front-end cheapened while duration has rallied in outright terms. The price action makes sense — Fed credibility is compressing forward inflation expectations.” Darrell Cronk, chief investment officer for wealth and investment management at Wells Fargo: “This means the Fed should go with hiking rates next week and the yield curve, swaps and fed fund futures are all confirming the same. The surprise function would now be if the Fed remained on hold.” Skyler Weinand, chief investment officer at Regan Capital: “Friday’s CPI print was in-line with expectations, but inflation is still too hot, and the Federal Reserve’s hands are tied. A rate hike next week is all but assured. Consumer prices are going in the wrong direction, and remain significantly higher than the Fed’s 2% target. We may see several rate hikes over the coming months in an effort to get short-term interest rates in line with where the market is pricing yields.” Jeff Schulze, head investment strategist at Franklin Templeton Institute: ” This print solidifies the case for several rate hikes in the near-term and will not be a material driver to risk assets as equities and fixed income investors have largely prepared for the commencement of a Fed hiking cycle, with 3.5 rate hikes already priced into Fed Fund futures before today’s release.” Ryan Weldon, portfolio manager at IFM Investors: “With energy prices reaccelerating and core prices firming more than expected, it will be difficult for the Fed to explain why holding rates makes sense against a backdrop of low unemployment. An already jittery rates market is anticipating a hike, but no follow-through from the Fed will likely lead to more dysfunctional price action and a loss of credibility for the Fed.” Alexandra Wilson-Elizondo, co-chief investment officer of multi-asset solutions at Goldman Sachs Asset Management: “Today’s CPI came in broadly as expected, which on the surface is the outcome investors were hoping for, but it does make next week’s rate decision a jump ball. The challenge is that the data does not fully capture some of the inflation pressures that have emerged more recently, and there is little evidence to suggest inflation is returning to target in the near-term.” Peter Boockvar, CIO at One Point BFG Wealth Partners: “If all we did was look at CPI, a core rate of 2.4% y/o/y would be comforting but knowing that what happens with higher energy prices doesn’t stay with just energy prices, we have to assume there will be spill over, particularly with this move higher in diesel prices.” Sonu Varghese, chief macro strategist at Carson Group: “That was an uncomfortably hot CPI report, and not just because of oil, tariffs or AI-related goods bottlenecks. Services inflation excluding shelter ran at a 6.3% annualized pace in August, suggesting the labor market is stronger than the data imply. With the inflation outlook worsening further amid higher oil and record diesel prices, the Fed now looks likely to kick off a new hiking cycle at next week’s September meeting.” Christopher Hodge, chief U.S. economist at Natixis CIB Americas: “[Fed Chairman Kevin Warsh’s] shaky July presser combined with a renewed hawkishness in Jackson Hole will likely now force a hike next week in order to avoid falling into a self-imposed credibility trap. Fed voters that have been on the fence, such as Governor Waller, have placed the burden of proof on encouraging inflation prints in order to avoid hiking and today’s print does not qualify. We think a nudge via a hike or two is probably what the Fed will think is appropriate, starting with a hike next week.”
