Fed Rate Decision Hinges on August Inflation Data

The Federal Reserve is expected to hold interest rates steady at its upcoming September meeting, despite stronger economic data and market pricing for tightening. According to a Reuters poll of economists, only 65 out of 93 expect the Fed to leave rates unchanged at 3.50%-3.75%, down from 90% in August. The remaining respondents anticipate a quarter-percentage-point increase, which would be the first since July 2023.

Market pricing now reflects the possibility of two Fed rate hikes by March, as two-year Treasury yields have risen about 20 basis points since Jackson Hole. Economists forecast annual PCE inflation at 3.5% for 2024 and 2.4% in 2027, with inflation not expected to hit the 2% target until after 2028.

Several economists say the August Consumer Price Index report will be decisive for the near-term policy path. Eli Nir, U.S. economist at TD Securities, states that the Fed is likely to stay on hold next week if data develop as expected, but a stronger-than-expected inflation reading could prompt the start of a hiking cycle.