Fed Faces Credibility Test Amid Market Expectations of Rate Hike

Markets have priced in an 86% chance of a Federal Reserve rate hike at its September meeting, following hot August inflation numbers. This has led to a split among economists on whether the decision is driven by concerns over inflation or credibility.

Economists are divided between those who see the move as necessary to combat rising prices and others who believe it's a matter of Chairman Kevin Warsh upholding his own hawkish language from his Jackson Hole speech last month. Warsh had declared that with 12-month PCE inflation at 3.7%, the Fed's 'predominant focus right now should be on prices.'

The numbers behind the split show August core consumer prices rose 0.3% on the month, more than expected, while headline inflation was up 0.4%. The FT puts August core CPI at 2.4% year-on-year, the lowest since Covid, but 3.5% at a month-over-month annualized pace.

Warsh's own baseline is tougher than the CPI optics, with 12-month PCE inflation at 3.7% and six-month change at 4.1%. Some economists argue that without an anomalous wireless services price jump, the Fed could have paused.