September Rate Hike Odds Surge Above 65% After Core CPI Overshoot

The Federal Reserve's upcoming rate decision on September 16 has just gotten a lot more interesting. The Bureau of Labor Statistics released its August Consumer Price Index report, and a single tenth-of-a-percentage-point miss in the core monthly reading, 0.3% versus the 0.2% consensus, has pushed market-implied odds of a September rate hike above 65%. This is significant because it means that borrowers with variable-rate credit cards, home equity lines of credit, car loans, and mortgages will see higher interest rates sooner.

The core CPI reading was the key figure in this report. It rose 0.3% for the month after a 0.2% gain in July, and the annual core rate held at 2.4%. However, the monthly rate was a tenth above what analysts forecasted. This overshoot adds fresh ammunition to the contingent of Fed officials who are prepared to push rates higher if inflation does not retreat toward 2%.

Before this morning's report, prediction market data showed September hike probability running between 50% and 57%, having already risen sharply from the roughly 40% level before Fed Chair Kevin Warsh's Jackson Hole remarks. Now, analysts broadly expect that probability to breach 65%. The energy cost embedded in the August report is already landing on household balance sheets, with gasoline prices up 27.4% year-over-year and food away from home climbing 3.4% over the past twelve months.

The Fed's decision will be based on the data it has, including this morning's CPI report, the August jobs report (released September 4), and any other relevant economic indicators. With the Federal Open Market Committee meeting just around the corner, borrowers with variable-rate debt should be prepared for higher interest rates sooner rather than later.