"It's Time for the Fed to Either Act or Stop Making Promises": How Wall Street Reacted to the Inflation Data

The U.S. Consumer Price Index (CPI) in August slightly exceeded economists’ expectations, virtually confirming investors’ belief that interest rates will be raised at the Federal Reserve’s (Fed) upcoming meeting on September 15–16. At the same time, stocks reacted positively to the report: major U.S. indices are on track to break this week’s losing streak. What does Wall Street now think about the Fed’s next moves?

— “It’s time for the Fed to either act [to back up its previous rhetoric about its intention to combat rising inflation] or stop making promises,” wrote Omair Sharif, president and founder of Inflation Insights, in a note to clients (as quoted by Bloomberg). Now, amid demands from U.S. President Donald Trump to lower rates, Fed Chair Kevin Warsh faces serious market pressure calling for the opposite—a rate hike, the agency notes. Following the release of the latest macroeconomic data, traders have raised their expectations of a Fed rate hike at the next meeting to over 86%, although just a week ago that probability stood at 59%.

— “The recent acceleration in the rise of oil, gasoline, and diesel prices is heightening concerns that rising energy costs could spread to other goods and services and also affect inflation expectations. “Therefore, we now expect the Fed to raise rates by 25 basis points at its monetary policy meeting next week,” said Nationwide Chief Economist Cathie Bostjančić (as quoted by Bloomberg).

— “A rate hike next week is virtually guaranteed. Consumer prices are moving in the wrong direction and remain well above the Fed’s 2% target,” said Skyler Weinand, chief investment officer at Regan Capital (as quoted by the BBC).

— The Fed may indeed raise rates, but from an economic growth perspective, the consequences of this decision will not be that significant, according to Jeffrey Roach, chief economist at LPL Financial. “An increasing share of economic activity is becoming less sensitive to interest rates. [...] Against the backdrop of a sharp rise in AI investment, as well as continued spending on travel by baby boomers and affluent consumers, demand may remain resilient despite tighter monetary policy,” he noted.

— Citigroup economists have calculated that, based on today’s CPI data and yesterday’s producer price index (PPI) figures, the core Personal Consumption Expenditures (PCE) index—the Fed’s preferred measure of inflation—rose by 0.29% month-over-month in August. The actual data will be released on September 30—after the Fed meeting. A 0.29% increase would be the strongest in the past three months, Bloomberg noted.

— “Now, it seems that the only thing that could prevent a rate hike at the Fed’s September 15–16 meeting is a sharp stock market decline, a freeze in corporate lending, or a combination of the two,” — Barron’s quotes economist David Rosenberg as saying.

— “It’s no longer just a matter of fine-tuning the economy. After five years of inflation above the target level, regulators will likely conclude that restoring price stability will require more than one rate hike,” says Sima Shah, chief global strategist at Principal Asset Management.

— “It’s becoming increasingly difficult for the Fed to dismiss persistent inflation as merely a temporary supply shock,” says Mike Skordeles, head of U.S. economics at Truist Advisory Services, as quoted by Barron’s. According to him, along with more persistent inflationary pressures, there are signs that the “secondary effects” of the ongoing oil shock are beginning to manifest in certain other energy-related sectors. For example, airfare prices rose 2.7% in August compared with the previous month and 23.4% year-over-year amid a sharp increase in jet fuel prices. “If you’re already planning to raise rates in the future, why not do it today? We’re talking about a mere quarter-percentage-point increase, which is by no means the end of the world for the economy,” Skordeles added.

— The market needs to hear the Fed’s stance and, perhaps, get some guidance from the regulator, according to Ed Al-Hussein, a portfolio manager at Columbia Threadneedle Investments, as quoted by Bloomberg. “It seems that three rate hikes are a good starting point, and we cannot factor in any more into our expectations until the Fed takes any action.”

— “The Fed will likely deem it appropriate to tighten policy slightly—by raising rates once or twice, starting with a hike next week,” notes Natixis analyst Christopher Hodge. His comments are cited by Bloomberg.

This article was AI-translated and verified by a human editor