Bank of America Keeps Sept Fed Hike Call as 3.4% CPI Looms Larger Than Jobs

Q: Will a sudden spike in the upcoming inflation report force the Fed into a shocking September rate hike?

A sharp upside surprise in next week’s CPI could very plausibly push the Fed into a September rate hike, but it would not be a true shock. Markets, economists and several major banks already see September as a close call, with odds of a quarter-point move rising after Chair Kevin Warsh’s Jackson Hole remarks and the strong August jobs report. The key reason is that the Fed’s focus is still inflation, not payrolls. Bank of America has said the jobs report is unlikely to determine the outcome on its own and continues to expect a September hike. Warsh has repeatedly described the labor market as stable, with unemployment at 4.1%, while stressing that inflation remains above the 2% target and that recent softer readings do not yet prove underlying price pressures are easing. That makes the Sept. 11 CPI report the pivotal test. Consensus expects headline CPI at 3.4% year over year, unchanged from July, but analysts see upside risk from energy, housing and services. If CPI comes in meaningfully hotter than expected, it would strengthen the case for a hike because it would suggest inflation is not cooling fast enough and could reinforce the Fed’s “higher for longer” stance. Still, one report alone may not force the Fed mechanically. Policymakers will also weigh core measures, recent PCE data, market conditions and the fact that long-term Treasury yields above 5% are already tightening financial conditions. So a hot CPI would make a September hike more likely, not inevitable.

1 articles · Updated · Business Insider · Sep 2

Bank of America said Friday's August payrolls report is unlikely to decide the Fed's Sept. 15-16 meeting, keeping its call for a rate hike unless employment data badly undershoots.
Sept. 11 CPI is the key release, with economists expecting inflation at 3.4%; BofA said upside risk remains because price pressures from the U.S.-Iran war have not eased.
Kevin Warsh's Jackson Hole remarks reinforced that view by describing labor markets as stable and near full employment while stressing inflation still sits above target.
Bond yields at multiyear highs have raised the stakes for both reports, and BofA expects an outsized market reaction to any weak jobs print even if uncertainty persists until CPI.