Fed on Hold as Subdued CPI Data Fuels Rate Hike Uncertainty

TD Securities economists Oscar Munoz and Eli Nir expect the upcoming August Consumer Price Index (CPI) to be subdued, which would keep the Federal Reserve (Fed) on hold in September. This expectation is based on the CPI-to-PCE translation, which suggests contained underlying inflation.

According to Governor Waller, he prefers to pause rate hikes as long as inflation data allows him to do so. However, he emphasized the importance of this week's August CPI report.

Munoz and Nir forecast a modest 0.18% monthly increase in core PCE, with market-based expectations even more subdued at 0.13%. This would be a welcome number for centrist FOMC members like Waller and Williams, potentially keeping the Fed on hold in September.

The economists also expect the Fed to remain on hold over their forecast horizon, citing high inflation and a stabilized labor market that allows the FOMC to focus on its inflation mandate. They believe any rate move this year is more likely to be a hike than a cut.