Traders Boost Bets on a September Increase
Traders nudged up their expectations on Thursday that the Federal Reserve will lift short-term rates at its gathering next week, after the first major inflation reading of the week, according to Reuters. Before that release, futures pricing implied roughly a 65% likelihood of a quarter-point increase at the September 15-16 meeting; that figure has since moved to about 70%, based on CME Group fed funds contracts. Market pricing also suggests the central bank will very likely raise rates once, possibly twice, before the year is out.[S1]
Thursday's figures put U.S. producer prices up 5.4% for the 12 months through August, and weekly jobless claims suggested the labor market remains steady. While the headline wholesale price gain landed in line with what economists had forecast, finer points of the Producer Price Index showed that part of the recent cooling in inflation is unwinding. The data hinted that fresh Middle East conflict is hampering worldwide oil flows, while heavy AI-related spending is boosting electronics demand. Producer costs for transportation and warehousing, hospital services, and airfares all increased in August.[S1]
Consumer Price Report Due Friday
Friday's consumer price report will round out the inflation picture for Fed policymakers as they judge whether the current policy rate is restraining the economy enough to steer inflation back to their 2% objective. Inflation has now run above that target for 5-1/2 years, and the Fed has kept its policy rate at 3.50%-3.75% since December. Capital Economics analysts noted that, with producer prices still looking fairly hot overall, the Fed will probably tighten this year even if it holds off this month, though whether it acts next week hinges on Friday's more significant core consumer price reading.[S1]
The Fed measures its 2% inflation goal using the 12-month change in the Personal Consumption Expenditures Price Index, which can be approximated once consumer and producer price figures are in hand. On Thursday, analysts disagreed about whether the producer price data would lift PCE inflation high enough to force the Fed to act next week. Earlier in the day, the European Central Bank lifted its key rates to fight inflation stemming from the Iran war, which has driven Brent crude futures above $100 a barrel.[S1]
