Fed seen likely to raise rates next week after inflation report

Investing.com - A hotter-than-expected core inflation reading on Friday pushed the probability of a Federal Reserve rate hike next week to 85%, up sharply from roughly 70% before the report.

"With core CPI running hotter than consensus on a monthly basis, and accelerated from July's pace, we now think this would tip most FOMC members over in favour of a hike in the upcoming FOMC meeting next week," CIBC Economics economist Helen Lao said in a flash note.

The Bureau of Labor Statistics reported that core CPI, which strips out food and energy, rose 0.3% in August, topping the 0.2% consensus forecast. Headline CPI climbed 0.4% for the month, in line with expectations, as gasoline prices rebounded after two consecutive monthly declines. Year-on-year, headline inflation held steady at 3.4%, while core CPI eased slightly to 2.4% from 2.5% in July.

The data lands five days before the Federal Open Market Committee convenes for its September 15-16 meeting — a session that markets now widely expect to produce the first rate increase since July 2023.

The 10-year note auctioned on September 9 cleared at 4.834%, up from 4.683% at the prior auction. The 30-year bond auction on September 10 yielded 5.308%, versus 5.216% previously, as sellers pressed long-dated government debt amid rising rate-hike bets.

Investors in rate-sensitive sectors — particularly utilities and real estate investment trusts, face direct margin pressure if the Fed delivers the quarter-point increase the market is now pricing.

Friday's print did not arrive in isolation. Thursday's producer price index showed U.S. wholesale prices rose 0.4% in August and 5.4% year-on-year.

Brent crude's sustained move above $100 a barrel, tied to renewed Iran-related hostilities, has kept gasoline prices elevated and complicated the Fed's effort to declare inflation contained.

The ECB added another dimension to the global rate picture on September 10, raising its deposit facility rate to 2.50% from 2.25% and its main refinancing rate to 2.65% from 2.40%, as energy-driven inflation pressures intensify across major economies.

The Fed has kept its policy rate in the 3.50%-3.75% range since December 2025, a pause that many analysts had expected to extend well into 2027. That calculus shifted materially after Fed Chair Kevin Warsh delivered a hawkish address at Jackson Hole in late August, sending two-year Treasury yields surging.

All eyes now turn to Wednesday, when the FOMC announces its rate decision alongside updated economic projections.

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