Wash Fed Chair on the Hot Seat Amid Rising CPI and Pressure for September Rate Hike

[Mexico City = Shim Young-jae, Correspondent] The U.S. core Consumer Price Index (CPI) for August came in stronger than expected, pushing the likelihood of a Federal Reserve (Fed) rate hike in September above 85%. As support for additional tightening builds within the Fed, institutions like TD Bank and JPMorgan Chase have shifted their outlook to anticipate a rate increase following the CPI announcement. Kevin Wash, the Fed Chair, is caught between the need to curb inflation and pressure from President Donald Trump for rate cuts as he approaches next week's policy decision.

According to a report by Bloomberg on the 11th (local time), the core CPI for August rose by 0.3% compared to the previous month. The inflation rate excluding food and energy exceeded market expectations. Bloomberg reported that this figure bolstered the arguments of policymakers who have been advocating for the Fed to take action to rein in inflation, which has remained high for over five years.

Omair Sharif, head of Inflation Insights, noted in a client memo that "the Fed now needs to show action."

The market also moved quickly towards a rate hike immediately after the CPI announcement. According to Bloomberg, the probability of a rate hike at the Federal Open Market Committee (FOMC) meeting on the 15th-16th has surpassed 85%, a significant increase from about 70% the previous day.

Investors have also begun to price in the possibility of a second rate hike by December.

Before the CPI announcement, economists tracking the Fed did not have as strong a view on rate hikes as the futures market. However, some institutions revised their forecasts after the inflation data was released.

Bloomberg reported that TD Bank and JPMorgan Chase adjusted their forecasts to expect a rate hike at the next meeting following the CPI announcement.

Diane Swonk, chief economist at KPMG, stated, "This figure firmly establishes that the focus of policy is shifting towards rate hikes. The question is no longer whether to raise rates, but how much to raise them to curb inflation."

Surge in Wireless Communication Fees Drives Core Prices Up

According to data compiled by Bloomberg, a significant portion of the rise in core inflation in August was due to the largest increase in wireless service prices on record.

Some view this price surge as a one-time factor affecting inflation. However, Bloomberg reported that several analysts believe it will be difficult for the Fed to keep rates on hold based solely on expectations of future price improvements.

The market is also paying renewed attention to comments made by Wash on August 28 in Jackson Hole, Wyoming.

According to Bloomberg, Wash pointed out that core inflation has not meaningfully improved. He stated that unless there is new confidence that prices are heading towards the Fed's 2% target, policymakers have "work to do."

Sharif remarked, "After making such a speech in Jackson Hole, he cannot support a rate hike at the next meeting."

Support for a rate hike within the Fed had been expanding even before the CPI announcement.

Bloomberg noted that the Fed has kept the benchmark interest rate on hold at five meetings this year. However, at the July meeting, three policymakers voted against the hold, calling for a 0.25% increase. Two Fed officials who did not have voting rights at that time also indicated they would have supported a rate hike if they had been able to vote.

Other policymakers supporting the hold have projected that core inflation will slow in the coming months. Some of them have acknowledged that additional evidence of price deceleration is needed to continue supporting the hold.

Bloomberg reported that a rate hike next week could bolster confidence in Wash's statements about curbing inflation. Given that the Fed was criticized for not adequately explaining its reasons for holding rates in the July 29 press conference, this could serve as an opportunity to restore the trust that was damaged at that time.

A team of analysts led by Krishna Guha at Evercore ISI stated in a client memo that "the likelihood of a Fed rate hike next week now appears high."

They expect that Wash will determine that recent indicators are not sufficiently strong to ignore additional price pressures stemming from rising oil prices. They also anticipate a high likelihood that he will choose to raise rates to maintain the trust that has been shaken since the July press conference, securing support from a majority of policymakers.

Trump Calls for Cuts as Oil Prices and Inflation Expectations Rise

If a rate hike materializes, tensions between President Donald Trump and the Fed could escalate.

According to Bloomberg, President Trump has continuously demanded rate cuts from Wash, whom he appointed.

Last week, Trump threatened that if the Fed did not lower rates, he might halt trade with some countries.

Kevin Hassett, chair of the White House Council of Economic Advisers (CEA), stated in an interview with Bloomberg TV on the 11th that "if the Fed moves significantly, the President will likely have something to say about it."

Bloomberg reported that while Trump referred to Wash as the Fed's "great new leader" until last week, he may begin to criticize further if rate hikes continue beyond one.

Variables surrounding inflation also remain. As tensions surrounding Iran continue, international oil prices have risen again. Bloomberg reported that Brent crude reached $109 per barrel on the 10th.

Some economists have pointed out that factors stimulating inflation, such as the expansion of data center construction, are unlikely to disappear in the short term.

Consumer concerns about inflation have also grown.

According to a survey by the University of Michigan, expected inflation for the next year rose from 4.0% in August to 4.6% in early September.

For the first time since 2023, more than half of consumers expect rates to rise over the next 12 months.

Some Fed officials argue that the current level of rates is not suppressing demand as much as previously expected. Bloomberg noted that while there are no clear signs that wages are driving inflation, the unemployment rate remains low and is generally considered stable.

This environment has led to calls for the Fed to reverse the total 0.75% rate cuts implemented last year due to concerns about a slowdown in the labor market.

In a MarketPulse survey conducted by Bloomberg from the 8th to the 10th with 122 subscribers, the most common response was that if the Fed raises rates next week, this tightening will end with one or two hikes.

However, following the CPI announcement, there were also forecasts suggesting that more rate hikes may be necessary.

Joseph Brusuelas, chief economist at RSM US, stated in a client memo that "the Fed needs to reverse the three rate cuts implemented at the end of last year and slow the economy, which is expected to significantly exceed potential growth rates this quarter.

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