Fed’s Rate Decision May Hinge on Hundredths of a Percentage Point
The Federal Reserve’s interest rate decision next week could hinge on two data releases this week, and it might come down to hundredths of a percentage point.
The two reports are the Producer Price Index, released Thursday, and the Consumer Price Index, due Friday.
U.S. wholesale prices rose in August, according to the Producer Price Index, a measure of final demand costs for goods and services. It increased a seasonally adjusted 0.4% for the month, in line with the Dow Jones consensus, the Bureau of Labor Statistics reported.
On an annual basis, that put the PPI at 5.4%, still well above the Fed’s 2% inflation target and 0.1 percentage point higher than expected. The PPI rose 0.1% in July, a slight upward revision from the original estimate of no change.
Excluding food and energy, the core PPI accelerated by 0.2%, against the forecast for a 0.3% increase. Core less trade services, another volatile category, was up 0.3%, in line with estimates, CNBC reported.
Tiny Margins Could Influence Vote
Should the data come in hot, that would argue for a rate hike, CNBC noted. Conversely, if inflation appears to be cooling, Federal Open Market Committee voters may be willing to hold, judging by statements in recent days from key officials.
The difference between either posture is likely to be tiny, with Fed Chair Kevin Warsh left to take a side and persuade his fellow officials.
“The rate decision will then turn mostly on the inflation data but also to some degree on where market expectations settle post-release,” Krishna Guha, head of economics and central bank policy at Evercore ISI, said in a note. “The bar for a Fed hike is not tightly pinned down.”
With Fed officials publicly debating where they think policy should head, CNBC said there’s another wrinkle in the September debate: The inflation data released this week, while closely watched, isn’t what the Fed uses to set policy. That would be the personal consumption expenditures price index.
“This precision is ludicrous,” Guha said, arguing that if core PCE, which excludes food and energy, lands around 0.21% or 0.22%, that would tilt the FOMC toward a hold, while an implied 0.23% or 0.24% level “could well go to a hike.”
Information from both indexes will be used to estimate the PCE level, released at the end of the month, and thus to calibrate policy, CNBC said. Guha and other Wall Street forecasters expect the CPI and PPI data to point to a monthly PCE reading between 0.2% and 0.25%.
In Guha’s view, a slight deviation in either direction could make all the difference.
“With Warsh’s credibility under pressure, it will be tough to hold if the market prices a hike as clearly odds-on eve of the meeting,” Guha added. “So in the grey zone, reflexivity and the market response could tip the decision.”
Still Likely to Hold
That the final decision on rates could rest on such a small margin of error is characteristic of the nascent Warsh regime, in which the chairman’s oft-stated disdain for tipping the Fed’s hand on rates leaves market participants left to guess what will happen.
Guha sees a hold as more likely, though far from certain.
“Our working hypothesis overall, heading into the week, we still think a hold is fractionally more likely than a hike,” he said. “This reflects our view that the inflation data is likely to break on the cooler side and that the bar for a hold is higher than it was pre-Jackson Hole but not impossibly so.”
In recent public statements, Warsh has emphasized his displeasure that the Fed has missed its 2% inflation target for the past five-plus years. Markets took the remarks, made at the central bank’s annual symposium in Jackson Hole, Wyoming, as a sign that Warsh will push for a quarter percentage point hike when the committee votes Sept. 16.
President Donald Trump last week threatened to cut off trade with countries that have a surplus against the U.S. if the central bank doesn’t cut rates, a move seen in some circles as yet another attack on the Fed’s independence that could harden policymakers’ positions.
