In the United States, the year-on-year growth of core CPI in July hit a 5-year low, coupled with sudden negative non-farm payroll data, leading the market to believe that the probability of a rate hike by the Federal Reserve in September is less than 40%. However, internal divisions within the Fed have attracted attention from the outside world, with several officials expressing an attitude towards tightening monetary policy.
On August 13, data released by the Bureau of Labor Statistics (BLS) in the United States showed that the year-on-year growth rate of the Producer Price Index (PPI) in July was reported at 4.7%, lower than the market’s expectation of 4.9% and significantly lower than the previous value of 5.5%; the monthly growth was lower than the market’s expectation of 0.2%. The core PPI, excluding factors with significant volatility such as energy, rose by 4.2% year-on-year in July, in line with market expectations.
Data released by the Bureau of Labor Statistics on August 12 showed that the U.S. CPI in July increased by 3.4% year-on-year and 0.1% month-on-month.
The not seasonally adjusted core CPI in the United States for July, excluding volatile food and energy prices, increased by 2.5% year-on-year, hitting its lowest level since 2021. The not seasonally adjusted core CPI increased by 0.2% month-on-month in July.
In the breakdown of the July CPI data, energy prices decreased by 1.5% month-on-month, continuing the downward trend from June, serving as the largest factor suppressing inflation. Meanwhile, housing costs remain high, a key factor in keeping the inflation rate above 2%. The Bureau of Labor Statistics stated that even though the increase in housing costs is not significant, it still accounts for about two-thirds of the overall price increase.
Following the release of the data, the market’s expectations for rate hikes changed based on the Fed’s focus on non-farm payroll and core CPI data. Pricing in the interest rate futures market on the Chicago Mercantile Exchange showed significant adjustments, with the probability of the Fed maintaining interest rates unchanged (3.50%–3.75%) climbing to 55.9% (up from 54.1% before the data release). The probability of a cumulative 25 basis point rate hike decreased to 44.1% (down from 45.9% before the data release).
On Polymarket, a prediction market sensitive to macroeconomic reactions, the market’s expectation of a rate hike by the Fed in September plummeted to 32%. At the same time, the probability of the Fed keeping rates unchanged in September surged to 67%.
Analysts believe that two consecutive months of moderate inflation data have weakened the Fed’s rationale for a rate hike in September. The unexpected decline in non-farm payrolls in the U.S. in July (a decrease of 23,000 jobs) last week poses a challenge for Fed Chairman Kevin Warsh in considering further tightening monetary policy, as hiking rates abruptly could harm the already fragile job market.
Ellen Zentner, Chief Economist at Morgan Stanley Wealth Management, told CNBC, “The inflation rate is as expected, which will support the ‘no need to hike rates’ view formed after last week’s employment report. Another round of inflation data will be released before the Federal Open Market Committee (FOMC) meeting in September, so the situation could still change. However, unless these data show a drastically different trend, the Fed is likely to keep rates unchanged next month.”
However, since the Federal Open Market Committee of the Federal Reserve decides on monetary policy through voting, the market is more focused on the attitudes of Fed officials. While the Fed kept the benchmark rate at 3.50%–3.75% last month, three decision-makers advocated for a rate hike, highlighting internal divisions on monetary policy.
Given that the inflation rate has been above the Fed’s 2% target for several years, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, explicitly opposes cutting rates too early and too aggressively. In a video published on Wired’s website on August 11, he stated, “The biggest problem the U.S. economy faces right now is not industry collapse or job collapse, but prices rising too fast. We indeed have an inflation problem, and people hate inflation.”
Beth Hammack, President of the Federal Reserve Bank of Cleveland, stated on August 10 that the Fed may need to hike rates multiple times to push the inflation rate down to the central bank’s target level of 2%.
Fed Governor Lisa Cook supported keeping rates unchanged at the July rate-setting meeting, but she mentioned in a public speech in Anchorage, Alaska last week that she is prepared to support a rate hike if the inflation data does not improve.
Next, the market will have to wait for the August CPI data and employment report. Warsh’s speech expected later this month at the global central bank summit will also be a focal point for the market.