The Federal Reserve is gearing up for what markets believe will be a rate hike at its September 15-16 FOMC meeting, and the numbers make the case look straightforward. August core inflation came in at 0.3% month-over-month, above the 0.2% consensus. Headline CPI sits at 3.4% year-over-year. Futures markets have priced in an 85% probability of a 25-basis-point increase, which would push the federal funds target range from 3.50%-3.75% up to 3.75%-4.00%.
But at least one economist is pushing back on the standard narrative. The argument: this hike is less about taming consumer prices and more about managing expectations on Wall Street.
A tale of two inflation numbers
The core CPI reading of 2.4% year-over-year is not a crisis figure. It is above the Fed’s 2% target, but not dramatically so.
The headline CPI at 3.4% tells a messier story, and oil prices above $100 per barrel deserve a significant share of the blame. Energy costs are notoriously volatile and largely outside the Fed’s control. Raising interest rates does not make oil cheaper. It does not resolve supply chain disruptions or cool geopolitical tensions that have kept crude elevated. What it does do is signal to bond traders and equity investors that the central bank is serious about its mandate.
