Fed Seen Being Aggressive for Longer After US Inflation Surprise
CPI excluding food and energy topped expectations in August
Fourth 75 bps hike in play in Nov., some see 100 bps next week
Federal Reserve officials face fresh pressure to extend rather than slow down aggressive interest-rate increases after US inflation came in hotter than forecast, potentially putting a fourth-straight 75 basis-point hike on the table.
While cheaper gasoline held US headline consumer inflation to a 0.1% advance in August from the prior month, the core measure that excludes volatile food and energy prices jumped 0.6% — double economists’ expectations, Labor Department data showed Tuesday.
Some investors wagered this could push them to deliver a 100 basis-point move when they meet next week, though that remained a minority view.
“This is a concerning report across the board for the Fed,” said Robert Dent, senior US economist at Nomura Securities, which is predicting a 100 basis-point hike next week. “Fed officials are going to be hard pressed to find any silver lining in this morning’s data.”
Investors now fully expect the Fed will lift its benchmark interest rate by 75 basis points for the third consecutive time when it meets Sept. 20-21. Traders also upped their bets that the Fed will deliver a 75-basis point move again in November, and investors now project the tightening cycle peaking around 4.3% as soon as March 2023.
With the data suggesting that price pressures are stubbornly high and broad-based, some saw the Fed being open to going even bigger next week.
“The CPI puts a 1% hike on table, and given the hawkish tone the Fed has delivered, ups the ante they will do it,” said Diane Swonk, chief economist at KPMG LLP.
Fed officials are working to quickly move rates into restrictive territory, a level at which policy is slowing economic activity and not stimulating demand. The consumer price index, which landed during the central bank’s pre-meeting blackout period, is one of the last major economic reports officials will receive before they gather next week.
“Today’s CPI report increases the odds that the Fed hikes by at least another 100 basis points over the November-to-December time frame,” said Neil Dutta, head of US economic research at Renaissance Macro Research LLC. “This takes the federal funds rate above 4% by year end.”
Some officials had already signaled they would support another big move this month. St. Louis Fed President James Bullard said in an interview with Bloomberg News on Thursday that he was “leaning more strongly” toward a 75 basis-point increase.
“Until I see a meaningful and persistent moderation of the rise in core prices, I will support taking significant further steps to tighten monetary policy,” Fed Governor Christopher Waller said Friday, after declaring that he supported “another significant increase” for this month.
Chair Jerome Powell and his colleagues have said their rate decision will be based on the “totality” of the economic data. An improvement in consumer sentiment figures and a surprise pickup in job openings also point to resilient households and consistently strong labor demand.
“We haven’t seen a tremendous amount of slowing in the real economy, and that keeps these super-sized rate hikes in play,” Jay Bryson, global economist at Wells Fargo & Co., said on Bloomberg Television.
Policy makers have said they would like to see inflation slow for several months before they ease off on tightening. The CPI report could bolster the argument of hawks on the FOMC that they have to do more to temper demand and help cool price growth.
While the Fed targets a different measure of inflation known as the personal consumption expenditures price index, and aims for 2% over the medium term, officials review the CPI data for guidance on where prices are headed.
As policy makers take stronger action to halt inflation, they face greater risks of pushing the US economy into a recession, said Mark Cabana, head of US rates strategy at Bank of America Corp.
“The Fed is probably going to overdo it,” Cabana told Bloomberg Television Tuesday, speaking before the CPI report was released. “We have seen them turn very hawkish with the labor-market strength. We think that the Fed will try and stick to this higher-for-longer mantra. That’s probably going to result in a recession.”