Consumer Inflation Data Is Expected To Downplay Rate-Hike Odds

Economists expect that US inflation will remain subdued – below the Federal Reserve’s 2.0% target — in Thursday’s update on consumer prices for August. If the forecast is right, the news will continue to stoke expectations that the central bank will delay the next rate hike into next year.

Econoday.com’s consensus forecast calls for the annual pace of headline and core inflation to stay under 2.0% for the fourth month in a row in August: 1.9% and 1.6%, respectively. If accurate, the data will mark the longest run of below-target inflation for both measures in two years.

Fed funds futures are currently pricing in a high probability that rates will remain unchanged at the next two FOMC announcements (Sep. 20 and Nov. 1). The outlook for a rate hike rises to roughly a 42% probability for the Dec. 13 meeting.

The question is whether this week’s inflation data will support the futures market’s forecast for moderately higher odds that the Fed will squeeze monetary policy at the end of 2017?

Jared Bernstein, a former chief economist to Vice President Biden, writes that “the Fed should pause or, if it must, raise rates even more slowly than its current plans do until inflationary pressures are very clear, as in tracking above 2 percent and rising.”

The economic blowback from hurricanes supports the dovish view, says Mark Grant, chief strategist at Hilltop Securities. “I think the Fed is going to stop, meaning the Fed is not going to call for any more rate hikes now.” He adds that the possibility of a rate cut is a possibility as a tool to support the rebuilding efforts in the wake of widespread damage from Harvey and Irma.

The Treasury market isn’t expecting a rate hike anytime soon, or so it appears based on the policy sensitive 2-year yield. This rate has been trending down since July, signaling that the crowd has downgraded the odds that the Fed is set to raise rates again.