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Large interest rate increase in September even if the CPI cools

  • Cooling inflation in August could raise hopes that the Fed will reduce its next rate hike.
  • Headline inflation could ease to a still warm reading of 8.1%, and stocks could rise if it comes in below that.
  • But the Fed has a long way to go to bring inflation down to its 2% target.

The upcoming US inflation report is expected to show further signs of cooling in consumer prices, data that could provide a short-term boost higher for a stock market that remains vulnerable to downside pressure, market experts said.

This week, some investment banks upgraded their rate hike forecasts ahead of the Federal Open Market Committee’s September and November meetings. Among them, Bank of America now expects an increase in the Fed Funds rate of 75 basis points in September and a move of 50 basis points in November, compared with earlier expectations of 50 and 25 basis points, respectively. It also added a forecast of a 25 basis point rate hike in January.

“While we move to a 75bp rate hike in September, we recognize that there is a risk of a smaller 50bp hike,” BofA said in a note published on Thursday. In a risk, “next week’s consumer price index report could surprise to the downside, opening the door to a smaller rise,” it said.

The Ministry of Labour’s inflation report for August comes on Tuesday with a consensus call among economists that puts overall inflation at 8.1%. This rate would mark a decline from July’s 8.5% and June’s 9.1% print, which was the highest in 41 years.

“The knee-jerk reaction will be very positive for stocks,” Edward Moya, senior market analyst at Oanda, told Insider. “You’re going to see a lot of investors expect the Fed’s job of raising interest rates to be done much sooner.”

Investors have priced in expectations that the Fed will deliver a third consecutive 75 basis point rate hike this month to help bring inflation down to its 2% target. The Fed has raised interest rates four times this year to a range of 2.25-2.5%.

A fall in petrol prices helped dampen inflation in July, and gas prices have since continued to move lower. The average price of gas in the United States was $3.78 a gallon as of Friday, according to the AAA motor club, down from $4.03 a month ago.

While lower gas prices are helping, Moya said ongoing supply chain issues and elevated shelter and power costs could prove stubborn for the Fed.

“I think we’re going to see that a lot of this inflation is sticky. Some of this inflation is going to bounce back. The Fed’s job is not going to be done by the end of the year, and the market is going to have problems struggling with that. And risk appetite is going to struggle over the next few months,” Moya said.

A decline in used car prices could contribute to an overall drop in the August consumer price reading, Wayne Wicker, chief investment officer at MissionSquare Retirement, told Insider.

“On a month-over-month basis, we will start to see negative numbers come through, and with that, inflation expectations should come down quite dramatically. But I think there will be a disconnect between the actual data coming through and policy,” he said .

“Powell remains pretty adamant that until inflation gets closer to the two, two and a half percent range, they’re going to be pretty vigilant,” Wicker said. “While I think there will be some short-term relief in equity markets if we see this increased slowdown in inflation, we will have concerns again with Fed tightening. We are not out of the woods and this is not going to stop anytime soon.” preferably soon.”

Wicker said he expects the Fed to raise the Fed Funds rate by three-quarters of a percentage point at its 20-21 meeting. September.

Goldman Sachs and Barclays also raised their rate hike forecasts to 75 basis points for September and 50 basis points for November. Barclays said it now sees only an “outside chance” that softer-than-expected inflation figures for August will swing the pendulum back towards a 50 basis point hike at the September FOMC meeting.

The probability of a September hike of 75 basis points climbed to 86% on Friday from 57% a week earlier, according to the CME FedWatch tool.

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