The stronger-than-expected US inflation reading this morning has boosted the odds that the Federal Reserve will raise interest rates in September, according to the futures markets.
US headline CPI rose 0.1 percent, as expected, while core prices excluding energy and food at 0.3 percent was the fastest pace since January 2013.
The members of the Fed’s policy board are locked in what has become an increasingly public debate on when will be the right time to raise interest rates, which have been near zero since December 2008.
At its last meeting, the Fed removed all calendar references in its forward guidance and said that recent economic weakness might be “transitory” in nature. This means that bank is now entirely dependent on data so a rate increase could happen at any future meeting.
Since the US central bank’s dual mandate is to maintain longer-run inflation at two percent per year and promote maximum employment, this forecast-beating inflation read could inch the FOMC closer to increasing the federal funds rate.
The CME Group’s FedWatch put the odds of a rate increase in September at 27 percent, a significant increase from probability of 18 percent last Friday.
FedWatch is based on 30-Day Fed Funds futures prices, which have long been used to express the market’s views on the likelihood of changes in US monetary policy.
The odds that the Fed will raise interest rates in December has risen to 61 percent from 49 percent last week and there is now an 83-percent chance that it will act by the end of first quarter of 2016.
Later today, Fed chief Janet Yellen is scheduled to give a speech on the economic outlook to the Greater Providence Chamber of Commerce later this afternoon. The markets could react with a good deal of volatility, especially given today’s core CPI number and the fact that volumes will be light due to the forthcoming holiday weekend.
(Editing by Mark Shaw)
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