Wall Street Bets on Rate Hike From a Fed Hemmed In by Persistent Inflation

Someone tell the president not to check the news this week. 

The Federal Open Market Committee will convene tomorrow and announce Wednesday whether it plans to cut, hike or hold the federal funds rate steady, and all signs point to a hike. The last key piece of economic data the Fed saw was Friday’s Consumer Price Index update, which showed that inflation kept up its elevated pace in August with a 3.4% increase from a year ago. “Core” inflation, which excludes volatile food and energy prices and is closely watched by the central bank, rose 2.4%. 

While the data was in line with expectations, it shows that inflation is still much too hot for the Fed’s liking. The odds of a rate hike jumped to about 87% after the report Friday morning. 

Trump’s Fed Fury  

This week’s Fed meeting comes shortly after President Donald Trump threatened to stop trading with some countries if there’s no interest-rate cut. But the Fed is politically independent, meaning it doesn’t need presidential approval, and it’s not likely to get it. 

“The Federal Reserve’s hands are tied,” said Skyler Weinand, chief investment officer of Regan Capital. A rate hike “is all but assured.” 

But what comes after? 

• Friday’s CPI not only solidified expectations for a Fed rate hike, but more importantly, it boosted expectations of where policy rates peak next year, which now stand near 4.5%, said Bill Merz, head of capital markets research at US Bank Asset Management. Oil prices have been the primary catalyst for rising long-term bond yields and rising expectations for multiple rate hikes in the coming quarter, he added, “but stocks remain only about 1.5% below all-time highs despite negative headlines.”
• Eric Winograd, chief US economist at AllianceBernstein, said that from an economic perspective, there is “very little justification” for only one, or even only two, rate hikes. For now, he’s penciling in one additional rate hike this year. 

Bond Price Blues: Treasury yields rose to multiyear highs late last week as oil prices surged, with the 10-year Treasury hitting a level not seen since 2023. In other words, the bond market may already be doing some of the Fed’s job.