Fed Rate Hike Likelihood Soars After Inflation Report Climbs Higher

The Federal Reserve is likely to raise interest rates next week following the release of the latest Consumer Price Index, which showed inflation remaining stubbornly elevated. The CPI rose 0.4% from July through August to 3.4% at an annual rate, matching economists' expectations. Core CPI, which removes food and energy costs, came in slightly above analyst targets at a 0.3% increase from the prior month.

Market watchers had been awaiting Friday's report for guidance on what the Fed might do when it meets to decide the direction of rates. The high print relative to the central bank's 2% inflation target bolstered expectations that a rate hike is more likely than not. Guy LeBas, a fixed-income strategist at Janney, wrote that 'today's CPI all but locks in a Fed rate hike next week. The only question is 25 or 50' basis points.

Futures traders have increasingly bet on a 25-basis-point hike on Wednesday, with CME Group's FedWatch tool showing more than an 85% chance of a rate increase on Friday. A rate hike would increase borrowing costs across the economy, including for commercial real estate acquisitions, refinancings and operations.

The elevated inflation rate has coincided with continued resilience in the labor market, which added 162,000 jobs in August while revising the prior two months' data to reflect the creation of an additional 55,000 positions than previously reported. With the Fed's dual mandate of maximum employment and price stability, the macroeconomic picture has added pressure on Fed Chairman Kevin Warsh to vote along with the central bank's Federal Open Market Committee to raise rates.