Defense · Report Line
For months now, investors have been debating whether the Federal Open Market Committee (FOMC) will raise interest rates at its upcoming September meeting on Sept. 15–16. The FOMC has been on pause all year despite inflation remaining above the Fed’s 2% target. With just days left before the meeting, a critical data point—the Consumer Price Index (CPI) for August—will be released on Sept. 11, likely influencing the FOMC’s decision and potentially making it a massive day for the stock market.
Since the Iran war began at the end of February, surging oil and gas prices have raised inflation concerns. The market has shifted from expecting rate cuts to anticipating hikes to combat inflation. Stocks typically underperform during rising interest rates because safer assets like bonds yield more, increasing the risk-free rate used in discounted cash flow valuations. This raises the discount rate, heavily discounting future cash flows and lowering valuations.
While oil prices could drop if the war ends, there is no clear end in sight. Some data this year suggests inflation is easing, but the FOMC has become more divided. At its July meeting, the FOMC held rates steady, but three members dissented for a quarter-point hike. On Sept. 11, the CPI reading for August will be released, the last major data point before the September meeting.
The FOMC has 19 members, but only 12 vote. If the CPI comes in higher than expected, particularly on core CPI, enough members could support a quarter-point hike. The Federal Reserve Bank of Cleveland’s Nowcasting tool expected the CPI to rise 0.36% in August, with core CPI rising 0.2%. A 6-6 tie would leave rates unchanged.
Earlier this month, U.S. nonfarm payrolls added three times as many new workers as expected in August, a positive for the economy but fueling consumer spending, which drives most of U.S. GDP. Based on the August jobs report, the likelihood of a quarter-point hike at the Fed’s September meeting has risen to 58.4%, according to CME Group’s FedWatch tool.
Federal Reserve Chair Kevin Warsh, who took office earlier this year, has been scrutinized for his stance on inflation. He has noted that prices are too high and that the Fed needs to rein it in, but he has also criticized current inflation measurement methods, suggesting a different gauge would likely show lower inflation. Warsh faces the challenge of avoiding political backlash, especially with midterm elections approaching. A rate hike this month would likely face opposition from President Donald Trump’s administration, but if inflation data comes in hotter than expected, Warsh may have enough support to proceed.
If the FOMC leaves rates unchanged despite a hot inflation report, it could draw uncomfortable questions. Alternatively, if inflation data aligns with or is below estimates, the Fed may avoid a hike, sending the market higher. Investors should avoid making near-term bets around the Sept. 11 inflation report, as predictions are uncertain and market reactions unpredictable. However, understanding the potential impact will help investors make more rational decisions, even if that means doing nothing.
Source: The Motley Fool
