September CPI: Will the Fed increase rates again in October after the latest report?

The Federal Open Market Committee (FOMC) will meet for two days starting 31 October to decide on the US central bank’s periodic stance on interest rate policy. After beginning an aggressive increase in borrowing costs starting in March 2022, policymakers have slowly been taking the foot off the pedal.

Last month they held off hiking interest rates for a second time since doing so in June. The Fed has been watching a range of data to determine its policy moving forward looking for indications that their efforts to tame inflation, which peaked at 9.1 percent in June 2022, are paying off.

September CPI: Will the Fed increase rates again in October after the latest report?

Despite the Consumer Price Index (CPI) report for September showing a 0.3 percent core inflation increase, the current prediction is that the Fed won’t raise fed funds rate at their next meeting. Markets had been expecting a 0.3 percent month-over-month increase in September’s core CPI, which strips out volatile energy and food price increases. Year-over-year core inflation was 4.1 percent, down from 4.3 percent in August.

Even prior to the Thursday release of the CPI, over 90 percent of investors in fed rate futures were betting that the Federal Reserve would hold rates steady when the next FOMC meeting wraps up 1 November according to the CME FedWatch tool. This is in part due to the Producer Price Index (PPI) data released on Wednesday that showed hopeful indications Personal Consumption Expenditures (CPE) Price Index, the Fed’s primary inflation rate. While wholesale prices were above expectations coming in at 0.5 percent as opposed to the 0.3 percent forecast, those for airfares and portfolio management fell and healthcare services were tame.

The latest core PCE is running at just 2.1% on a three-month annualized basis, dropping from 3.1% in July. That is just above the US central bank target but policymakers want to see six months of tame data to gain confidence in the trend according to Fed Chair Jerome Powell.

Additionally, policymakers have indicated that an uptick in the 10-year Treasury yield is getting the markets to do the work of taming inflation for them. “Financial markets are tightening up and they are going to do some of the work for us,” said Fed Governor Christopher Waller.