The big question is whether the Fed will raise its Fed Funds rate 0.75% at its meetings this week or feel compelled to hike rates a full 1%.
- Although gasoline prices were down 11% m/m in August, CPI inflation was up 0.1% month over month, and up 8.3% over the last 12 months. The bigger surprise was that core inflation was up 0.6% m/m and up to a new cyclical high of 6.3% over the past 12 months.
- Fed Chair Powell has maintained his hawkish tone saying: “we need to act now, forthrightly, strongly as we have been doing”. Futures markets have been expecting a 75 bp increase in the Fed Funds rate so understandably are anxious that it could be more.
- GDP growth is rebounding in the third quarter, albeit more slowly with retail sales and industrial production last week being weaker than expected.
The August inflation data won’t change the Fed’s hawkish mood on combating inflation, but broadening disinflationary pressure pushing inflation expectations back towards normal levels might be enough to keep the Fed on track with a 75 bp rate increase.
- The probability of a 100 bp Fed Funds rate hike is low given the evidence of slowing economic growth and slower consumer spending.
- The Fed is already at the “neutral rate” of interest and a 75 bp increase in the Fed Funds rate will be a restrictive policy. A higher rate would be an unnecessary risk to breaking an economy that so far is bending successfully in the direction the Fed is pushing.
Earnings revisions continue to be better than expected in both the US and EU. S&P 500 companies are expected to post earnings growth of 3.7% for the third quarter (FactSet).
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