Fresh inflation data have made a September interest-rate cut by the Federal Reserve even harder to justify, with economists telling Newsweek they predict either a rate hold or even a hike next week. The latest Producer Price Index (PPI) and Consumer Price Index (CPI) data have provided two of the final major inflation readings available before the Federal Open Market Committee (FOMC) meets on September 15 and 16. PPI rose 0.4 percent in August, matching expectations, while its annual increase accelerated to 5.4 percent.
CPI also rose 0.4 percent in August, with core CPI increasing 0.3 percent from the previous month, a firmer reading than economists had expected. Rebel Cole, a finance professor at Florida Atlantic University, and Peter Ireland, an economics professor at Boston College, both expect the Fed to hold rates steady. Cole told Newsweek that policymakers are likely to wait for more evidence on the health of the labor market, while Ireland said the Fed appears willing to wait longer to see whether inflation continues moving toward its 2 percent target.
Meanwhile, Jeffrey Campbell, a professor of economics at the University of Notre Dame and a former senior economist and research adviser at the Federal Reserve Bank of Chicago, is more hawkish. He predicts a rate increase, potentially by 50 basis points, arguing that inflation remains too high and that strong economic conditions give the Fed room to raise borrowing costs. The latest PPI and CPI data could influence the outlook, particularly because they show inflation remains above the Fed's 2 percent target, with core consumer prices rising more than expected in August.
But the economists said policymakers are unlikely to react mechanically to a single monthly reading, instead looking for a broader trend in inflation and the labor market. Ireland expects the Federal Open Market Committee to repeat the pattern of its July meeting, when it left rates unchanged but had three members vote in favor of a quarter-point increase. He said the central question facing policymakers is whether inflation will return to the Fed's 2 percent target on its own or whether higher interest rates will be needed to bring it down.
Ireland said recent comments from Fed Chair Kevin Warsh suggest the central bank is prepared to "wait a bit longer" for more evidence that inflation is moving in the right direction. Federal Reserve Governor Christopher Waller made a similar argument in a September 3 interview. Waller said inflation remains above the Fed's 2 percent goal but that recent data showed signs of disinflation.
He said he would favor holding rates if that improvement continued, while warning that a disappointing batch of August data could justify a rate increase at the September 15-16 meeting. "I expect the Warsh Fed to stand pat next week and await additional data on the health of the labor market," Cole said. "I predict a rate increase, possibly even 50 basis points," he said, pointing to inflation that has remained elevated and what he described as strong labor-market conditions and aggregate demand.
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