Fed rate hike expected this week after hot inflation data

The Federal Reserve is anticipated to increase interest rates by 0.25 percentage points during their meeting this week, according to a Reuters poll of economists. This marks a significant shift from the previous week's consensus, which indicated no change. Eighty-six out of 101 polled economists, representing an 85% majority, believe the Fed will raise its benchmark rate to 3.75%-4.00% at the meeting on September 15-16, as reported by Reuters.

This would be the first rate hike since July 2023. The recent surge in inflation data, with August's consumer price index increasing by 0.4% seasonally adjusted, driving the year-over-year figure to 3.4%, has driven this decision. The core Consumer Price Index, excluding food and energy, rose by 0.3% for the month, 0.1 percentage point above expectations.

Strong producer price readings have also contributed to the belief that core Personal Consumption Expenditures inflation, the Fed's preferred measure, has increased in August. The pressure has been exacerbated by oil prices trading above $100 a barrel due to ongoing conflict in the Middle East, leading to higher inflation expectations.

Scott Anderson, chief U.S. economist at BMO Capital Markets, warned that the Fed's credibility is on the line, stating that they need to back their hawkish statements with concrete action at the upcoming meeting.