After the release of the US inflation report last Friday (11th), a survey result released by Reuters on the 14th showed that out of 101 economists, 86 (85%) expect the Federal Reserve to raise interest rates by 0.25 percentage points at the meeting on the 15th and 16th, bringing the target range for the Federal Funds Rate to 3.75%-4.00%.
This expectation marks a significant reversal compared to a week ago. In the previous Reuters survey completed on September 9th, about 70% of the surveyed economists expected the Fed to keep rates unchanged. However, recent data, including employment and producer prices, have been stronger than expected, coupled with higher-than-forecasted inflation data in August, prompting economists to reassess the interest rate path.
The market not only anticipates a rate hike in September but also begins to speculate on the Fed potentially raising rates further, with some analysts even expecting multiple rate hikes within this year.
The survey by Reuters on the 14th showed that out of 70 economists, 37 (about 53%) expect the Fed to raise rates at least once before the end of March next year; in contrast, in the previous survey completed on the 9th, 56% of respondents still expected rates to remain unchanged by the end of this year.
Senior economist at Bank of America, Stephen Juneau, stated that recent data does not show a significant cooling of inflation. The Consumer Price Index (CPI) in August exceeded expectations, along with some strong producer price data, which may raise the Personal Consumption Expenditures (PCE) inflation indicator that the Fed closely watches.
PCE is an important inflation gauge for the Fed, with a long-term inflation target of 2%. Currently, PCE inflation levels are approaching double this target, indicating that price pressures remain significantly higher than the Fed considers a healthy level.
Additionally, ongoing conflicts in the Middle East are driving up energy prices, with crude oil futures surpassing $100 per barrel and diesel prices hitting new highs, further adding to the uncertainty about future inflation.
If the Fed raises rates this week, it will be the first rate hike since July 2023; and if another rate hike occurs before the end of March next year, it may signal the US entering a new rate hike cycle.
The market is also concerned that if rates are not raised this week, it could result in a significant increase in bond yields.
Chief US economist at BMO Capital Markets, Scott Anderson, said: “The Fed’s credibility in combating inflation is being tested. They must take concrete action at the upcoming meeting to support their hawkish rhetoric, or they face the risk of a steeper government bond yield curve.”
Currently, the 10-year US Treasury bond yield hovers around a sensitive level of about 5%.