Probability of Federal Reserve Rate Increase Surges to 70% on Inflation Concerns

Key Takeaways

• Traders now assign a 70% probability to the Federal Reserve increasing interest rates at its September 16 policy meeting
• The producer price index for August increased 0.4%, driving annual wholesale inflation to 5.4%
• Crude oil prices in the United States surpassed the $100 per barrel threshold, intensifying inflationary concerns
• The yield on 10-year Treasury notes surged to 4.92%, marking the highest level since the financial crisis
• This Friday’s consumer price index data could either strengthen or weaken rate hike expectations

A surge in wholesale inflation combined with crude oil exceeding $100 per barrel has elevated the likelihood of a Federal Reserve rate hike at next week’s meeting to 70%, while markets simultaneously factor in the possibility of an additional increase before the year concludes.

PPI Data and Energy Prices Fuel Hawkish Expectations

According to CME Group’s FedWatch tool, financial markets are currently pricing in a 69.8% probability of a 25-basis-point rate increase at the Federal Open Market Committee gathering on September 16, representing a jump from Wednesday’s 61.2% forecast.

This recalibration followed the release of producer price index figures showing a 0.4% monthly increase for August. Combined with July’s upwardly adjusted 0.1% advance, the annual PPI measurement reached 5.4%.

Simultaneously, benchmark U.S. crude oil prices rallied 4% to slightly above $100 per barrel. Elevated energy costs typically cascade into broader inflationary pressures across the economy, providing additional justification for Federal Reserve action.

The European Central Bank made its own move Thursday, implementing a quarter-point rate increase while raising its inflation projections. ECB officials cited the continuing tensions with Iran as a potential threat to long-term price stability.

Jeffrey Roach, who serves as chief economist at LPL Financial, observed that inflationary forces are becoming deeply embedded in the economy. He characterized a September rate adjustment as probable under present circumstances.

David Russell, serving as global head of market strategy at TradeStation, highlighted the dual pressures of ascending oil prices and persistently low unemployment claims. He suggested the Fed would find it challenging to maintain its current policy stance next week.

Bond Market Responds as Fed Expectations Shift

The benchmark 10-year Treasury note yield advanced 7 basis points to reach 4.92% in the aftermath of the PPI release. This represents the highest reading recorded since the financial crisis era.

Market participants have also increased the probability of a secondary rate increase in December to approximately 60%. This adjustment reflects growing apprehension that inflation will not decline rapidly enough to allow the Fed an extended pause.

Stephen Juneau, senior economist at Bank of America, indicated that core personal consumption expenditure prices are running at a 0.26% monthly pace for August. When rounded, this would register as 0.3%, which he believes should provide sufficient justification for tightening monetary policy.

Bank of America maintains one of the most aggressive outlooks among major Wall Street institutions, projecting three consecutive rate increases at forthcoming policy meetings.

Peter Boockvar, chief investment officer at One Point BFG Wealth Partners, cautioned that even a moderate consumer price index figure on Friday would not signify that inflation has been tamed. He emphasized that the pipeline pressures evident in PPI statistics paint a contrasting picture.

The consumer price index report for August is scheduled for release Friday. The Dow Jones consensus forecast anticipates a headline annual rate of 3.4% alongside a core measurement of 2.4%.

Fed Chairman Kevin Warsh has previously emphasized that the PCE price index serves as the central bank’s primary inflation measurement. Core PCE registered at 3.3% during July.

Friday’s CPI release represents the final significant economic indicator before policymakers render their decision.