The Fed is wary of another rate hike after “disappointing” inflation

(Bloomberg) — Better-than-expected inflation is likely to keep the Federal Reserve keeping its options open to raise interest rates again in November or December after an expected pause this month.

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The so-called core consumer price index, which excludes food and energy costs, rose 0.3% from July, the first acceleration in six months, data from the Bureau of Labor Statistics showed Wednesday. It rose 4.3% from a year ago, still well above the Fed’s target, although it was the smallest increase in almost two years.

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

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Fed Chairman Jerome Powell said at the Kansas City Fed conference in Jackson Hole, Wyoming, in late August that inflation remains too high and central bankers are prepared to tighten monetary policy more if necessary. The Federal Open Market Committee raised its key interest rate in July to a range of 5.25% to 5.5%, a 22-year high, and its latest forecasts called for another rate hike in 2023.

Investors are not sure whether there will be another increase. They expect the Fed to leave interest rates unchanged at its policy meeting on September 19 and 20, and bets for a hike in November were less than even, according to futures.

“This data supports a pause in September,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “However, the FOMC is unlikely to declare victory until it sees further signs of improvement toward the 2 percent target. They remain open to further rate hikes if necessary.”

Treasury yields fell back to little changed levels after the report, showing that the report did not significantly change investors’ view of interest rate trends.

Excluding the housing and energy sectors, services prices rose 0.4% from July, the fastest in five months, and 4% from a year earlier, according to Bloomberg calculations. The so-called Supercore index is considered important because it is heavily influenced by the labor market, so a still tight labor market could keep these prices high for some time.

What Bloomberg Economics says…

“We think the Fed will likely see through the increase in energy prices, but it is not clear whether it will do the same with the increase in transportation services… Our base case is still that the Fed will raise interest rates September remains stable, but … “the risk of a rate hike in November has increased.”

—Anna Wong and Stuart Paul

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While core inflation could be weaker in September, “I continue to believe that we will see a rise in the core interest rate in the fourth quarter, which could lead to the Fed pulling the trigger on another rate hike at the December meeting,” said Omair Sharif, President of Inflation Insights LLC.

Central bankers may be concerned that rising energy prices could raise inflation expectations, which are considered crucial to the inflation outlook. West Texas Intermediate oil prices rose to their highest since Nov. 11 on Tuesday as OPEC data showed global markets face a deficit of 3 million barrels a day next quarter.

The FOMC, which sets policy, has raised its federal funds rate 11 times since March 2022. Officials, including Powell, have stressed that they will proceed cautiously toward the end of their aggressive rate hike cycle and will rely on data to determine whether further hikes are needed.

– With assistance from Matthew Boesler.

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