Fed Hike on Horizon as Inflation Risks Mount

The Federal Reserve's decision to raise interest rates is becoming increasingly likely as new inflation data suggests upside risks. A modest increase in the funds rate, starting with a quarter point in September and potentially 50 or 75 basis points higher by the end of the year, could help ensure inflation is trending down. The recent headlines have tilted the odds towards a rate hike, driven by concerns over a prolonged conflict in the Middle East, trade tensions with Canada, and chip shortages due to the AI buildout.

While the incoming inflation data has been encouraging, it's not enough to clear the bar for a hold. PCE prices through July show disinflation relative to the spring, but both headline and core PCE inflation are still far from the 2% target. Fed Governor Chris Waller highlighted the 3-month changes as more encouraging, but skeptics like former Fed Governor Warsh argue that this is not meaningful progress.

There are several risks driving upside inflation: a prolonged conflict in the Middle East could bleed into non-energy prices; trade tensions with Canada suggest tariff increases may not be over; and the AI buildout will continue to push up inflation through memory-chip shortages. These risks have increased since July, making it harder for the Fed to hold off on raising rates.

Despite this, some still argue that holding is the best option. Better inflation data or headlines could shift opinions back towards a hold. The September meeting will provide clarity on how Fed officials are processing the same information, but with the current trends and risks in mind, a modest rate hike seems increasingly likely.