Wall Street Journal Says Fed's Next Decision Depends on Friday's CPI
The Wall Street Journal reports that the Federal Reserve's next interest rate decision may depend on the inflation report released on Friday, as well as whether August prices show that inflation has finally cooled. The Bureau of Labor Statistics is set to release the August CPI on September 11 at 8:30 AM, which will be the last complete consumer price reading before the interest rate meeting around September 16.
The July CPI was up 3.4% year-on-year and 0.1% month-on-month, with core CPI at 2.5% year-on-year. Predictions among institutions are not uniform: some expect a 0.4% month-on-month increase in August, with year-on-year remaining steady at 3.4% and core year-on-year slightly dropping to 2.4%; others expect a year-on-year drop to 3.3%. Energy prices remain a headline concern, with gasoline and diesel pump prices recently strengthening, and the national average diesel price just breaking $6 per gallon, while crude oil returns to triple digits, potentially supporting the August headline.
Chairman Kevin Warsh's committee has differing views on raising rates versus continuing to observe. Traders are pricing in a 25 basis point hike in September at about 60% to 70%, fluctuating with energy news. The Fed focuses more on PCE, but CPI is released earlier and is more detailed, which will be used to revise the pre-meeting path. August non-farm payrolls reported an increase of 162,000, weakening the argument that "employment has collapsed, so we cannot raise rates."
The market sees Friday as a switch to determine whether to rule out or confirm a September rate hike. A month-on-month increase of 0.4% does not automatically equate to a trend reversal, and core services and housing components will still be examined separately. The European Central Bank has raised the deposit rate to 2.50% and warned that energy inflation may persist, while the U.S. is facing the same set of oil prices in the same week.
Mechanically, this is data options. The buyer is betting on a rate hike as a short-end short; the seller is betting on inflation falling, and the curve does not need to price in another rate hike. Funds are moving between treasuries, overnight index swaps, and dollars. Beneficiaries are market makers who can quickly adjust points after 8:30; those under pressure are positions with too long a duration and those that write "finally cooling" as a single condition. The event is driven by the last CPI calendar before the interest rate meeting, and the report has not yet been released.
On a supplementary level, PPI has already reached some trading desks ahead of CPI. PCE will only be fully updated after the meeting, so Friday's CPI carries an overweight policy weight.
Source: Public Information
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Delegating the decision to an unreleased CPI before the meeting is outsourcing the committee's disagreements to the statistical bureau. July was already mild, and if August is buoyed by energy, the core is the evidence Warsh needs. Diesel breaking $6 and crude oil hitting triple digits means that "cooling" must be established after excluding energy; otherwise, the market will rewrite rate hikes as a response to energy rather than an overheating labor market.
The capital path is "forecast - swap - decision." The spread fluctuating between 60% and 72% indicates a lack of consensus, only options for 8:30. Money flows from long-duration treasuries to overnight rates. The motivation is to avoid appearing behind the ECB during an energy shock week. Employment remains decent, providing political space for rate hikes and data space for holding steady.
In comparison to previous FOMC meetings where CPI was written as a switch, and during 2022 when energy dominated headlines and core was priced separately: single prints rarely change cycles but can alter weekly pricing. The industry phase is a race between secondary energy inflation and core retreat. Control lies in the components, not in the headline year-on-year.
Structural changes represent a transfer of pricing power. The mechanism is that the next move in the policy rate is bound to a consumer price print ahead of PCE, with the statistical bureau's calendar temporarily holding more pricing power than the committee's statements; if energy dominates the headline, the transfer will immediately revert to oil prices.
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- The last CPI before the meeting will temporarily hold more pricing power than the chairman.
- Headline cooling must first pass the energy hurdle; the core then counts.
- When the probability of a rate hike hovers around 60%, the market is buying the print, not the path.