Federal Reserve: Close call on further tightening – Commerzbank

Commerzbank’s Dr. Christoph Balz expects the Federal Reserve to keep rates unchanged, but highlights a significant risk of another 25 bps hike. He notes gasoline-driven headline Consumer Price Index (CPI) strength versus moderate core inflation, and stresses that upcoming jobs and Consumer Price Index (CPI) data could tip the decision. Political pressure and concerns about entrenched inflation expectations complicate the Fed’s policy path.

Gasoline lifts CPI, core stays moderate

"Will the Federal Reserve raise interest rates or not? A clear decision is not yet in sight, even though the risk of a rate hike has increased. Today, Friday, the August jobs report will be released, and consumer price data will be released at the end of next week."

"As for consumer prices, we expect a significant increase of 0.4% from July. This would be noticeably higher than last month’s 0.1%. The main reason is the gasoline price, which has risen another 4% following the renewed escalation in the Persian Gulf."

"Fed officials could therefore argue that the inflation trend continues to slow and refrain from raising interest rates. In principle, a single monthly figure should not play a decisive role anyway. However, several Fed officials have made it clear that they fear the inflation rate—which has been too high for too long—could increasingly influence wage and price negotiations."

"Ultimately, we still expect the Federal Reserve to hold interest rates steady. However, there is a significant risk that things could turn out differently. If the figures—particularly the core inflation rate—surprise on the upside, a 25-basis-point hike would likely be in order."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)