Fed May Hike Rates for Second Time Amid Surging Inflation

The Federal Reserve may initiate its second interest rate hike on October 28, according to market expectations. The latest business-sentiment survey data showed a surge in price-related indicators, pushing overall inflation to its highest level since October 2022. The S&P Global PMI report stated that input costs for both goods and services surged sharply, primarily driven by higher fuel and transportation prices.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, wrote that rising input costs 'will further push up selling prices in the months ahead, intensifying inflationary pressures.' Federal Reserve Governor Michael Barr stated at a conference in Chicago: 'To bring inflation back to its target level in a timely manner, the Fed will likely need to further adjust monetary policy.'

The bond market responded by posting an unusually sharp rise on Wednesday. The yield on the 10-year U.S. Treasury note surged to 5.12%, hitting a new 19-year high. Pricing in the CME FedWatch Tool reflects the latest shift in expectations, with current market pricing putting the probability of a rate hike at the FOMC's next policy meeting at 73%.

Going forward, the market will be focused on next week's August Personal Consumption Expenditures (PCE) price index release. If the data come in as expected, it would further reinforce Chairman Powell's hawkish stance and bolster calls for additional monetary policy tightening. However, a pre-election rate hike could invite criticism from policymakers.