Fed's Rate Hike Decision Hinges on This Week's Inflation Data
The recent escalation of US-Iran military strikes has heightened geopolitical tensions, pushing international oil prices and global shipping costs for energy even higher. This backdrop sets the stage for a crucial test: the upcoming release of the August CPI inflation data, which will determine whether the Federal Reserve returns to a rate-hiking path at the September FOMC monetary policy meeting.
As stated by Fed Governor Waller, the burden of proof has shifted, only a significant downside surprise in CPI can prevent the Fed from resuming rate hikes. Powell's hawkish signal at Jackson Hole and Waller's stance that 'continuing improvement in inflation allows for patience' underscore the importance of this week's report.
The August US nonfarm payrolls report showed an unexpectedly strong gain of 162,000 jobs, weakening the Fed's rationale for pausing tightening due to employment concerns. However, average hourly earnings rose 3.1% year-on-year, which does not support equating labor market resilience with runaway wage inflation.
Given the current economic landscape and rising energy prices, a hotter CPI report could force the Fed to hike rates in September. With employment worries reduced, inflation is now the 'final hurdle' for further rate increases. The market expects August US headline CPI to rise 0.4% month-on-month, with core CPI expected up 0.2% month-on-month.