Futures Traders Just Dramatically Repriced the Chances of a Fed Hike Next Week

Suddenly, an interest rate hike by the Federal Reserve next week looks a lot like a sure thing.

That’s according to the federal funds futures market, which now puts the chances of a rate hike at next week’s Federal Open Market Committee (FOMC) meeting at about 88%. Just a week ago, futures pricing had the chances of a hike at 59%. And a month ago, it was a coin flip, with odds at 48%. That’s according to CME FedWatch, which tracks futures pricing.

So, what happened to make futures traders dramatically hike the probability that the Fed will hike its target rate on Sept. 16?

Well, two separate inflation reports came out this week, and both indicated that inflation is not moving back toward the Fed’s 2% year-over-year target. In fact, the data showed that inflation is getting worse.

Both producer and consumer prices are rising

On Sept. 10, a report from the Bureau of Labor Statistics (BLS) showed that wholesale prices jumped in August. The Producer Price Index, which measures changes in the prices of goods purchased by domestic producers, rose 0.4% in August from the previous month and 5.4% over the past 12 months.

Then, on Sept. 11, the BLS published its monthly report on consumer prices, the well-known Consumer Price Index. According to the data, prices rose 0.3% month over month in August, after excluding volatile food and energy prices. When those items are included, the price index rose 0.4% month over month and 3.3% year over year. That’s a lot higher than expected, and far above the Fed’s target.

Image source: Getty Images.

So, it seems that inflation is very sticky at this level and is not trending down toward the target. That means that new Federal Reserve Chair Kevin Warsh will almost certainly have to agree to raise the benchmark interest rate next week. Either that, or he’ll have a lot of explaining to do to investors and consumers.

And in fact, many Fed watchers and economists believe the Fed should have hiked interest rates at its last meeting in July. The FOMC left the federal funds rate unchanged at that meeting, though three committee members dissented and voted to raise it. Most of the rest of the committee will likely join those three next week, even if Warsh disagrees.

In the history of the Federal Reserve, the FOMC has never outvoted a Fed Chair on monetary policy decisions. Warsh was appointed to lead the Fed by President Donald Trump, who complained that the Fed should be cutting rates. If Warsh doesn’t defy Trump and agree to hike rates next week, he could be the first Fed Chair in history to be outvoted.