October Fed meeting hinges on this key economic data, Citi says

Markets are pricing a greater than 50% chance of a Federal Reserve rate increase during the October FOMC meeting, according to Citi economist Andrew Hollenhorst. Hollenhorst believes that the outcome of September's core CPI print might prevent this hike. This is reminiscent of September 2022, when a hotter-than-expected August inflation reading led to significant Fed action.

The Fed's decision-making process is increasingly sensitive to current inflation data and energy prices. Citi projects 85,000 new jobs will be added in the upcoming Friday's jobs report, and unemployment will rise from 4.1% to 4.2%. These figures, according to Hollenhorst, would not be enough to trigger a rate hike. Only a significantly poorer employment report or an unemployment rate of 4.3% could shift the odds against a hike.

September's CPI release is seen as the key factor, with Citi predicting a potential softer reading. In August, core CPI surprised with a 0.3% month-over-month increase, which influenced markets to anticipate a 25 basis points rate hike at the September FOMC meeting. A similar outcome in September 2023 would be highly beneficial for the Fed to maintain its current stance.

A revision of core PCE inflation, expected to show a substantial downward adjustment, is unlikely to make much of a difference. Citi acknowledges that other forecasters anticipate the revision will be mildly dovish, but its impact on policy decisions is limited since it is already expected. However, there is a group within the Fed that may favor a more patient approach.

Some officials might prefer to maintain current rates, given the widespread expectation of 50 basis points of total hikes for the year and a desire to observe the impact of rising Treasury yields on the economy.