September Fed Rate Hike Nearly Certain After Hotter-Than-Expected Inflation Data

The likelihood of the Federal Reserve raising interest rates this September has climbed to approximately 90%, according to economists, after an August inflation report came in hotter than anticipated. The potential increase would mark the central bank’s first rate hike since 2023.

Published Friday, the Consumer Price Index data revealed that inflation rose at an annual rate of 3.4% during August, matching July’s figure but exceeding the 3.3% forecast by analysts. According to the Labor Department, one-third of the monthly price increase was attributable to gasoline, which has surged 27.4% compared to the same period last year.

Data that strips out volatile food and energy categories, known as core inflation, increased by 0.3% from July. This pace accelerated from the previous month’s 0.2% rise and surpassed expectations, signaling that inflationary pressures are spreading beyond the energy sector as higher fuel costs permeate the broader economy.

Following the release of the figures, CME FedWatch data showed the probability of a rate hike at the Federal Open Market Committee’s Sept. 16 meeting jumping from 70% earlier in the week to nearly 90%.

EY-Parthenon updated its forecast to project a 25-basis-point increase at the upcoming meeting, which would move the federal funds rate into a target range of 3.75% to 4%. Greg Daco, chief economist at EY-Parthenon, stated in a Friday note that the firm is shifting its stance from expecting a hold to anticipating a hike, noting that some Fed officials may argue the disinflationary process is not moving fast enough.

Beyond the immediate meeting, Capital Economics has projected that a second 0.25 percentage point increase could occur in December, followed by another in March 2027. The August inflation data was collected prior to the recent spike in fuel costs, with oil prices surpassing $100 a barrel and diesel exceeding $6 a gallon this week.

Kathy Bostjancic, chief economist at Nationwide, highlighted concerns that renewed price hikes in oil, gasoline, and diesel could spill over into other goods and services. She joined other analysts in calling for a 25-basis-point rate increase at next week’s policy meeting.

A rate hike would increase borrowing costs for consumers, affecting mortgages, credit cards, and auto loans, while offering higher returns for savers on certificates of deposit and high-yield savings accounts.

The Federal Reserve faces a complex landscape as it navigates ongoing geopolitical tensions. The conflict in the Middle East involving Iran has contributed to a global oil shortage and a spike in energy costs, pushing inflation a full percentage point higher than its level at the start of the conflict in late February. Brent crude was trading around $105 a barrel on Friday.

Additionally, the Russia-Ukraine war continues to pressure oil prices after Ukrainian drone strikes damaged Russian energy infrastructure, further hampering refining capabilities and exacerbating fuel shortages.

Within the 12-member Federal Open Market Committee, several members have already indicated a willingness to raise rates if price pressures persist. During the July meeting, where rates were held steady, three members dissented and voted for an increase. Fed Governor Christopher Waller has also suggested support for a September hike if inflation does not make meaningful progress toward the Fed’s 2% target.