September's hot inflation data revived expectations that the Federal Reserve may raise interest rates this month, a prospect that appeared unlikely after recent policy signals. Fed Chairman Kevin Warsh has vowed not to steer markets with his own near-term outlook, but the inflation surprise heightens scrutiny of his remarks in Bangkok. In a fireside chat with IMF Managing Director Kristalina Georgieva, Warsh may have to send the only signal on the likely rate decision before the Fed's media blackout period begins Saturday ahead of the October 27-28 policy meeting.
Investors are waiting for Warsh to "bless the Fed going forward on hikes," said Bank of America strategist Meghan Swiber. The rapid shift in Fed bets followed the release of September's consumer price index, which showed broad-based inflation across goods and services. Prices for airfares, used cars, and medical care rose monthly alongside a surge in energy costs.
Computer and software prices saw record year-over-year advances, while toys posted the biggest annual increase since 1988. Traders lifted chances for an October rate hike to as much as 55%, from around 20% before the data. The implied probability later settled near 40%.
Most Fed watchers still expect the central bank to stay on hold this month, postponing the next increase until December. Midterm elections due after the policy meeting are another reason for caution. Analysts cautioned against overreacting in a fast-changing economy where sectors like housing remain in gridlock as mortgage rates increase.
Waiting until December would offer more time to assess price trajectory. "Many categories are warm, but there's no real evidence of acceleration," said Janney Montgomery Scott's Guy Le Bas. "We'd need a more convincing print to get so many of the 'go-slow' FOMC participants on board with a hike this month." Even so, prospects for a rate hike have shot higher as the October meeting has suddenly become a "live" one.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing