The Federal Reserve's September 16 rate decision could turn on fractions of a percentage point in the inflation data, according to Evercore ISI's Krishna Guha. Markets priced a 60% probability of a hike as of Tuesday, with Fed officials publicly split between hawks and doves ahead of the vote.
The Federal Reserve's interest rate call next week could hinge on just a few one-hundredths of a percentage point, with the deciding data arriving only after policymakers vote. Chairman Kevin Warsh must referee that gap and sway fellow officials one way or the other.
Why hundredths of a point matter
Investors are watching August producer and consumer price releases this week as the central bank's calculus may come down to fractions of a point, not the CPI or PPI figures themselves, but the core Personal Consumption Expenditures reading they help forecast. Guha said that if core PCE lands around 0.21% or 0.22%, that would tilt the FOMC toward a hold, while 0.23% or 0.24% "could well go to a hike." According to Guha: "This precision is ludicrous."
Economists surveyed by Dow Jones expect PPI to rise 0.4% for the month, putting the annual rate at 5.3%. For CPI, the consensus is 0.4% headline and 0.2% core, with annual rates of 3.4% and 2.4% respectively.
A Fed split between hawks and doves
The federal funds rate has held at 3.5%-3.75% since July 29, and that hold vote was not unanimous — it passed 9-3, with three dissenters pushing for a hike. Cleveland Fed President Beth Hammack continues to push for hikes, while Governors Christopher Waller and Michael Barr, along with New York Fed President John Williams, have leaned toward a data-dependent, more dovish approach. Hammack's predecessor, Loretta Mester, said Tuesday she also favors a hike to show the Fed is serious about inflation.
Adding to the pressure, the August payroll report showed 162,000 new jobs, roughly triple the approximately 55,000 economists had expected, while unemployment held at 4.1%. President Trump also threatened Friday to cut off trade with countries running a surplus against the U.S. if the Fed doesn't cut — seen in some circles as pressure on the Fed's independence that could harden policymakers' resolve.
What markets are pricing
Market pricing on Tuesday indicated a 60% probability of a rate increase, a level generally considered a rule-of-thumb dividing line for whether the Fed will move. Guha's working hypothesis still leans toward a hold, on the view that the inflation data is likely to break cooler, though he called the bar for a hold higher than it was before Jackson Hole. The committee votes September 16, with Warsh's press conference expected to lay out the reasoning behind whatever the FOMC decides.
Sources: CNBC, Crypto Briefing
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