A 50-50 bet on rate hikes: Tonight at 8:30 PM Beijing time, CPI data could determine whether the Fed 'pulls the trigger' in September or stays on hold!

Repost — U.S. Macro Outlook
The decision moment is approaching: higher-than-expected inflation could open the door to a series of rate hikes.

Traders are currently pricing in a roughly 50% probability of a rate hike in September. This means tonight’s CPI data could directly tip the balance. If the data aligns with expectations, the Federal Reserve may remain on hold; if it exceeds expectations, it could pave the way for consecutive rate increases.

The U.S. Bureau of Labor Statistics will release the July Consumer Price Index (CPI) at 8:30 a.m. Eastern Time on Wednesday (8:30 p.m. Beijing time tonight). According to Dow Jones consensus forecasts, headline CPI is expected to rise 0.1% month-over-month, while core CPI—excluding food and energy—is projected to increase by 0.2%.

On a year-over-year basis, headline and core CPI are both expected to decline by 0.1 percentage point from June, landing at 3.4% and 2.5%, respectively. Even so, annual inflation remains significantly above the Federal Reserve’s 2% target.

If July’s data comes in line with expectations, two consecutive months of relatively mild inflation readings would giveFederal Open Market Committeethe Federal Open Market Committee (FOMC) more time to observe.

“If the July CPI report broadly matches my forecast, the committee’s overall stance will cut through the noise of supply-side shocks, and the FOMC will likely remain on hold for the rest of this year,” said Joe Brusuelas, chief economist at RSM.

He believes thatThis data could also provide Fed Chair Waller with 'some added support.'Since taking office in May, Waller has faced a complex policy environment.

At the July meeting, the FOMC voted 9 to 3 to keep the key lending rate at 3.5% to 3.75%. All three dissenting members favored a 25-basis-point rate hike, and Board Governor Lisa Cook recently stated that if inflation data does not cooperate, she believes further rate hikes may be necessary.

Recent softness in some economic indicators, coupled with recurring signs of easing geopolitical tensions in the Middle East, has prompted markets to reassess interest rate expectations. The CME Group’s FedWatch tool shows thattraders currently see about a 50% chance of a rate hike in September, with higher probabilities assigned to potential hikes in October or December.

The Federal Reserve will receive inflation data for both July and August before its next policy meeting. Because the Kansas City Fed will host its annual symposium in Jackson Hole, Wyoming, in August, the Fed will not hold a regularly scheduled policy meeting that month.

‘If you’re not confused, you’re not paying attention,’ Brusuelas said, noting that this statement aptly captures the policy environment facing the Fed in mid-August.

Inflation showed notable relief in June. The headline CPI declined by 0.4% month-over-month, while core CPI was flat. Falling energy prices and moderating shelter costs were key contributors. The labor market also signaled potential weakness. Data released last Friday showed that U.S. employment in Julynonfarm payrollsdeclined by 23,000, while the unemployment rate fell to 4.1%.

‘I expect CPI to continue trending downward, which would further support the Fed holding rates steady rather than hiking, despite the weak jobs report released last Friday,’ said Dennis Follmer of Montis Financial.

However, some economists remain concerned that July CPI could surprise to the upside or at least show that inflation remains too entrenched for the Fed to ignore.

Bank of America still expects three rate hikes in the coming months. Economists at the bank noted in a client report that the July jobs report 'did not alter the overall picture of the labor market—it remains stable.'

More importantly, the report argues, recent comments from Federal Reserve officials indicate that the Fed’s policy reaction function has largely shifted toward focusing on inflation data.

Bank of America forecasts that if the Fed’s primary inflation gauge averages a 0.25% increase over the next two months, 'a rate hike in September is almost certain.' If the average increase is below 0.2%, the hike could be delayed; if it falls between 0.2% and 0.25%, the September decision would essentially become a 'coin toss.'

The ultimate outcome will depend on Walsh’s policy stance and the market’s prior assessment—based on recent reports—of whether he is genuinely willing to raise rates if necessary, or whether his dovish tone at the July press conference better reflects his true policy reaction function.

If July inflation significantly overshoots expectations, Walsh could face risks beyond just a single rate hike.The Federal Reserve typically does not make only one interest rate adjustment in a single direction.

Beth Hammack, President of the Federal Reserve Bank of Cleveland, is among the more explicitly hawkish voices. She was one of three dissenters at the June meeting and stated on Monday that the Fed might need to implement multiple rate hikes.

‘I’m not sure exactly where we’ll end up. Overall, a single 25-basis-point move probably won’t have a major impact on the economy. So, a certain number of adjustments may be needed—but I don’t want to pre-judge the exact number,’ Hammack told Yahoo Finance.

She also emphasized: ‘Given the stability we have in the labor market, I am fully focused on our ability to bring inflation back to target.’

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