Fed rate hike likelihood jumps to nearly 90% after hotter CPI report
Investors believe the Fed will raise borrowing costs as it works to tame inflation, which has risen a full percentage point since the Iran war started.
The latest inflation report has significantly increased the chances of the Federal Reserve raising interest rates in September. The Consumer Price Index climbed 3.4% in August, exceeding the economists' expectations of 3.3%. Gasoline prices, which have surged 27.4% year-over-year, accounted for a third of this increase. Core prices, which exclude volatile energy and food items, rose 0.3% from July, signaling broader inflationary pressures.
After the report, the likelihood of a September rate hike jumped to nearly 90%, up from 70% on Thursday. Economists now expect a 0.25 percentage point increase, potentially bringing the federal funds rate to 3.75%-4%. This move aims to bring inflation closer to the 2% target. The Fed has not raised rates since July 2023, in response to pandemic-induced high inflation.
The upcoming decision may signal more rate hikes, with Capital Economics predicting a second 0.25 percentage point increase in December and another in March 2027. Higher interest rates would increase borrowing costs for consumers, while benefiting savers through higher returns on CDs and high-yield savings accounts.
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