Markets Price 90% Chance of 25 Basis Point Rate Hike After 'Hot' CPI Reading

The recent Consumer Price Index (CPI) reading has sparked market expectations of a Federal Reserve interest rate hike. However, a closer look at the data reveals that the increase in core inflation is largely due to a few noisy categories.

According to the source, 'the weight of items in the CPI with inflation above three percent - the metric Warsh used in his Jackson Hole keynote speech - fell sharply' in August. This suggests that inflation is not broadening out as some might have feared.

Despite this nuance, markets are pricing a 90% probability of a 25 basis point interest rate hike next week. The author notes that 'the Fed not to hike with this pricing is inconceivable' due to the potential consequences on long-term Treasury yields.

The author highlights the emergence of a new Treasury-Fed accord, where the primary objective is to keep government borrowing costs under control. This is reflected in the recent rise in long-term government bond yields across advanced countries.