The Federal Reserve’s upcoming interest rate decision may ultimately rest on a razor-thin margin in inflation data, leaving markets deeply uncertain about which way policymakers will lean.
Investors are watching this week’s producer and consumer price releases as critical signals ahead of the Federal Open Market Committee vote scheduled for September 16.
Krishna Guha, head of economics and central bank policy at Evercore ISI, said the outcome will largely depend on incoming figures and how markets react to them.
“The rate decision will then turn mostly on the inflation data but also to some degree on where market expectations settle post-release,” Guha said in a note.
He added bluntly: “The bar for a Fed hike is not tightly pinned down.”
Guha argued that the margin separating a hold from a hike could come down to individual basis points within the personal consumption expenditures price index reading.
“This precision is ludicrous,” Guha said, noting that a core PCE reading of around 0.21% or 0.22% would tilt the FOMC toward a hold, while 0.23% or 0.24% “could well go to a hike.”
Wall Street forecasters, including Guha, expect CPI and PPI data this week to point toward a monthly PCE reading somewhere between 0.2% and 0.25%.
Economists surveyed by Dow Jones expect a headline PPI monthly increase of 0.4%, putting the annual rate at 5.3%, with consumer prices forecast at 0.4% monthly headline and 0.2% core.
Chairman Kevin Warsh’s public statements at the Fed’s annual symposium in Jackson Hole, Wyoming, signalled deep frustration that the central bank has missed its 2% inflation target for more than five years.
Markets interpreted those remarks as a sign Warsh could push for a quarter-percentage-point rate hike, though conviction remains low, with market pricing showing just a 60% probability of an increase.
Guha cautioned that Warsh’s positioning creates an additional layer of pressure on the decision, warning that reflexivity in markets could itself tip the outcome.
“With Warsh’s credibility under pressure, it will be tough to hold if the market prices a hike as clearly odds-on eve of the meeting,” Guha said. “So in the grey zone reflexivity and the market response could tip the decision.”
Fed officials are openly divided, with Cleveland Fed President Beth Hammack pushing for hikes while Fed Governors Christopher Waller and Michael Barr, alongside New York Fed President John Williams, have advocated a data-dependent approach.
Former Cleveland Fed President Loretta Mester added her voice to the hawkish camp on Tuesday, stating clearly that the Fed needs to act to demonstrate its commitment to fighting inflation.
“I would really be arguing to raise rates,” Mester said in a CNBC interview, pressing for Warsh to clearly justify whatever decision the committee ultimately reaches.
“I don’t think it’s necessarily built in that the Fed is definitely going to move rates up. The onus is on Chair Warsh when he comes out of that meeting and holds this press conference to really give us the case for why they decided to do what they did, whatever that decision is,” she added.
A further complication emerged after President Donald Trump threatened on Friday to cut off trade with countries running a surplus against the United States unless the Fed cuts rates.
The threat was widely interpreted as another challenge to the Fed’s independence, a move that could harden policymakers against any appearance of bowing to political pressure.
Guha maintained that a hold remains slightly more probable heading into the week, though he acknowledged the situation remains genuinely uncertain.
“Our working hypothesis overall, heading into the week, we still think a hold is fractionally more likely than a hike,” he said. “This reflects our view that the inflation data is likely to break on the cooler side and that the bar for a hold is higher than it was pre-Jackson Hole but not impossibly so.”