Fed Sets Stage for Rate Hike as Inflation Data Supports Tightening

Next week's Federal Reserve meeting is expected to bring a rate hike, with investors now seeing an 85-90% probability of a quarter-point increase. This follows August's inflation data showing headline inflation rising 0.4% from July and 3.4% over the past year.

The core CPI measure rose 0.3% during the month, faster than expected, and was up 2.4% higher than a year earlier. This has strengthened the case for policymakers who argue that the Fed should raise interest rates to combat inflation.

Financial markets have absorbed the prospect of tighter monetary policy without a major selloff in equities, with US stocks moving higher after the CPI release and Treasury yields mostly steady.

The debate has shifted from whether the Fed will hike to how many hikes this cycle will ultimately require, according to Seema Shah, chief global strategist at Principal Asset Management. This suggests that policymakers are likely to conclude that more than one hike will be needed to re-establish price stability.