The Fed’s interest rate decisions next week could hinge on just a few hundredths of a percentage point, and ultimately on inflation data that won’t be known until after the vote. All eyes will be on the announcement of producer and consumer prices for August (Thursday and Friday, respectively), as markets oscillate depending on which direction policymakers take. Interest rate hikes will likely be discussed if interesting data emerges. Conversely, if inflation appears to be calming, at least on a monthly basis, judging by what key officials have said in recent days, voters on the Federal Open Market Committee may be content to hold off. The difference in either stance is likely to be minimal, leaving Speaker Kevin Warsh to persuade his fellow officials to take his side. “Rate decisions will be driven primarily by inflation statistics, but will also depend to some extent on where market expectations settle after the policy announcement,” Krishna Guha, head of economics and central banking policy at Evercore ISI, said in a note. “The hurdle for Fed rate hikes is not firmly set in stone.” Another wrinkle has emerged in September’s debate as major reports continue to emerge as Fed officials publicly debate where they think policy should go. Despite the attention, the inflation figures released this week are not officially used by the Fed to decide policy. This is the personal consumption expenditure price index. “This precision is ridiculous,” Guha said, arguing that if core PCE, which excludes food and energy, settles around 0.21% or 0.22%, the FOMC will be inclined to keep rates unchanged, but if it is at the implicit 0.23% or 0.24% level, “there is a good chance that rates will be raised.” Information from both indices is used to estimate PCE levels and adjust policy, which are published at the end of the month. Guha and other Wall Street forecasters expect CPI and PPI data to indicate monthly PCE values between 0.2% and 0.25%. In Guha’s view, small shifts in either direction can make a big difference. “Warsh’s confidence is under pressure and it will be difficult to maintain policy if markets are pricing in rate hikes as clear odds on the eve of the meeting,” Guha added. “Therefore, in the gray area, reflexivity and market reaction can change decisions.”For this week’s data, economists surveyed by Dow Jones expect the headline PPI to rise 0.4% monthly, for an annualized rate of 5.3%. PPI is generally considered a wholesale price barometer. For consumer prices, the consensus is monthly headline 0.4% and core 0.2%, with annualized rates of 3.4% and 2.4%, respectively. Inside the numbers Yet another wrinkle: The PCE measure will soon face revisions to several key indicators, which economists believe will retroactively reduce the inflation measure by a few tenths of a percentage point. That the final rate decision could depend on such a small margin of error was a hallmark of the early Warsh administration, and the chairman’s frequent disdain for tipping off the Fed on interest rates leaves market participants only guessing what will happen. Mr. Guha believes that, although it is not certain, there is a high possibility that the matter will be put on hold. “We still think our overall working hypothesis heading into this week is slightly more likely to keep rates unchanged than to raise them,” he said. “This reflects our view that inflation statistics are likely to collapse on a cooling note, and that the bar to sustaining inflation is higher than it was before Jackson Hole, but not impossible.” In a recent public statement, Warsh highlighted his frustration with the Fed’s failure to meet its 2% inflation target over the past five years. Markets took the remarks at the central bank’s annual symposium in Jackson Hole, Wyoming, as an indication that Warsh would push for a quarter-point rate hike when the committee votes on Sept. 16. But Tuesday’s market price indicated a 60% chance of a rate hike, a level generally considered the rule of thumb for whether the Fed will raise rates, and confidence is low. Another wild card: President Donald Trump on Friday threatened to cut off trade with countries with surpluses if the Fed doesn’t make cuts, a move seen in some circles as another attack on the Fed’s independence and could harden policymakers’ positions. Fed officials have been divided recently. Hawks such as Cleveland Fed President Beth Hammack continue to push for higher rates, while a faction that includes Fed Directors Christopher Waller and Michael Barr, as well as influential New York Fed President John Williams, has become more dovish, advocating a data-driven approach. Hammack’s predecessor, Loretta Mester, also said Tuesday that she believes the Fed needs to raise rates to show it is serious about inflation. “I would strongly advocate for a rate hike,” he said in an interview with CNBC. “I don’t think it’s necessarily built in that the Fed is going to raise rates for sure. Whatever that decision is, the onus is on Chairman Warsh, who held a press conference after the meeting, to really explain to us why the Fed did what it did.”
