Federal Reserve's September Interest Rate Decision: Analyst and Economist Views 

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The latest data have vanquished hopes that U.S. inflation may be easing and are widely expected to have caused concern at the Federal Reserve barely a week out from September's interest rate decision, leading many analysts and economists to anticipate some of the strongest action yet from the Fed.

The overall rate of U.S. inflation ebbed slightly from 8.5% to 8.3% in August but it didn't fall as far as the market had expected due to a large month-on-month increase in food prices, while the rate of core inflation surged in both monthly as well as annual terms. 

Core inflation overlooks volatile energy and food costs so the August increase is likely to be of particular concern for Federal Reserve policymakers who were already inclined toward doing too much and too soon with U.S. interest rates rather than risk doing too little and too late

All of this comes at a time when Fed officials have been expressing increasing concerns about rising business and household expectations for inflation.

August's inflation surge also came at a point when Fed officials including Chairman Jerome Powell have increasingly been looking back to the 1980s in their public remarks, and the time of former Fed Chairman Paul Volcker, for insight about how to go about dealing with the present inflation. 

Chairman Volcker famously used brutally high borrowing costs to drive double-digit inflations rates out of the U.S. economy between 1979 and 1987, which was a volatile period for global financial markets as well as for the U.S. Dollar

Only time could tell what this means for September's interest rate decision although below is a selection of remarks from analysts and economists, in no particular order, setting out their views on this question and more. 

Kit Juckes, chief FX strategist, Societe Generale

"Inflation is becoming ingrained, thanks to strong demand, a strong labour market and accelerating wage growth. The FOMC has no choice but to plough on with aggressive monetary tightening."

"Just as there was more and more talk of a soft landing, the danger is that hitting the inflation nut hard enough for it to crack, breaks the table it’s sitting on. A higher peak in rates is likely and a hard landing is more likely too, but not yet."

"Yesterday’s reaction was dramatic because the ‘inflation is peaking’ narrative had fuelled the soft-landing story and helped equities rally. Where do we go now? The dollar got a lift, but I don’t think this latest surge can take us very far."

Chris Turner, regional head of research for UK & CEE, ING

"Yesterday's release of stubbornly high August CPI has increased fears that the Fed will need to slow demand even further to bring inflation back to its 2% target. This period in the global macro-financial cycle again recalls the early 1980s experience with Paul Volcker at the helm of the Fed."

"To put the inflation genie back in the bottle, Volcker took policy rates to 15% and was prepared to accept recession as collateral damage. No one in the market thinks the Fed funds policy rate is going above 10% anytime soon, but yesterday's inflation release did see the terminal Fed policy rate re-priced to 4.30% from 4.00%."

"That re-pricing of the Fed funds cycle - or the pricing of a harder stamp on the brakes - saw the US 2-10 year Treasury curve bearishly invert 10bp on the day to -34bp and the S&P 500 fall 4%. Inverted curves typically are late economic cycle phenomena and are normally associated with a stronger dollar and weaker activity currencies in particular. On cue, commodity currencies fell around 2% against the dollar yesterday and remain vulnerable."

Neil Wilson, chief market analyst, Markets.com

"Market rallies have betrayed hope that the Fed has somehow beaten inflation already – the peak inflation, peak hawkishness narrative. It’s a fool’s logic. Inflation is not going to decline by much even if has ‘peaked’ to all intents and purposes. This matters since CPI above 5% (it’s above 8% now) is still way above where the Fed would like it."

"It’s now looking a dead certainty that it will go for at least 75bps next week; markets are shortening the odds on 100bps. Crucially the terminal rate keeps moving up, now priced for 4.2% in April 2023. Personally, I don’t think the Fed stops until 5% on the Fed funds rate it hit. 

"The Bank of England will also seek to take stronger action than it has hitherto – the more ‘forceful’ action that has been hinted at lately."

Michael Every, global strategist, Rabobank

"Yesterday’s US CPI report was one of those market-moving blockbusters that underline why nearly all the people who like to pretend they know what is going on really have no clue."

"I have been warning “not transitory” for over a year, and yesterday specifically flagged that US CPI was only going back to 2% again in magical DSGE models, not real life."

"Many will still be updating their DSGE models to show an even higher near-term spike in CPI… and then the same magical return to 2%."

"Indeed, how many days or hours until we see headlines suggesting “the Fed doesn’t mean it,” or “the higher rates go up, the faster they have to come down,” or “it is still transitory if you look at (obscure object of choice)"?"

Edward Bell, senior director of market conomics, Emirates NDB

"The upside shock in the US August inflation reading will cement in a 75bps hike at next week’s FOMC meeting and bring the Fed Funds rate up to 3.25%. No statement from policymakers will be forthcoming until after the FOMC as the Federal Reserve is currently in its blackout period."

"Along with the rate decision next week, the Fed will also publish a new Summary of Economic Projections including a new dot plot. The June SEP had a median Fed Funds rate of 3.8% for 2023 and that is likely to shift higher as the inflation challenge is that much more pressing and the economy still appears to be holding up relatively well."

"A 75bps hike at the September FOMC appears a given and there is a strong chance of 75bps at the November meeting as well though we will get another inflation, jobs and GDP print before then for the Fed to consider. For now, we will hold our view that the Fed hikes by 50bps in November and December though the risks are overwhelmingly on the upside given how sticky inflation appears to be and how relatively robustly the economy is performing."

Mark Haefele, chief investment officer, UBS Global Wealth Management

"All of this leaves the Fed with little choice but to keep hiking interest rates, even at the cost of economic growth."

"Markets are fully pricing a 75-basis-point hike at next week’s FOMC meeting, and fed funds futures are pricing a peak of around 4.3% in March next year, an increase from expectations of a peak funds rate of 4% yesterday."

"Ultimately, we think that the Fed will be successful in cooling inflation and the labor market through their commitment to raising rates and their stated willingness to accept economic pain to get there. We note that televisions and smartphone prices are down 20% y/y, and we would expect to see similar rates of decline in used car prices in the coming months as well."

Lee Hardman, currency analyst, MUFG

"The much stronger than expected US CPI report for August has re-heightened fears over a hard landing for the US/global economy as the Fed is forced to keep raising rates further into restrictive territory to dampen upside inflation risks."