Fed Rate Hike Expectations Jump To 90%

Expectations of a US Federal Reserve rate hike have strengthened sharply after August inflation data came in above forecasts. Traders are now pricing in about a 90% probability of a 25-basis-point increase at the Fed’s meeting on 15–16 September, up from roughly 70% before the inflation report.

The Consumer Price Index (CPI) rose 3.4% year-over-year in August, matching July’s pace but exceeding economists’ 3.3% forecast. Core consumer prices, which exclude food and energy, rose 0.3% in August from the previous month, accelerating from 0.2% in July and above the 0.2% increase economists had expected. On an annual basis, core CPI increased 2.4%.

Gasoline prices accounted for about one-third of the monthly increase, with prices up 27.4% from a year earlier. The data suggest that inflationary pressures are broadening beyond energy, as higher fuel costs feed into other goods and services.

The latest figures followed hotter-than-expected producer price data. The PPI reading indicated that price pressures facing businesses remain elevated before costs reach consumers.

Oil Crosses $100 As Inflation Concerns Deepen

Rising crude prices have added to concerns about persistent inflation. Brent crude was trading around $105 a barrel on Friday, while US oil prices also moved above $100 a barrel. US diesel prices surpassed $6 a gallon, reaching a fresh record.

The increase in oil prices has been linked partly to the conflict involving Iran and disruptions to fuel supplies. The Russia-Ukraine war is also contributing to energy pressures, with Ukrainian drone strikes disrupting Russian refining capacity and tightening fuel supplies.

Inflation has remained above the Fed’s 2% target for around five and a half years. Higher tariffs and elevated energy costs could make it harder for policymakers to bring inflation back towards the target.

EY-Parthenon has shifted its forecast from a Fed hold to a 25-basis-point hike next week, which would put the federal funds target range at 3.75%–4%. Capital Economics expects another 25-basis-point hike in December, followed by a further increase in March 2027.

Trump Pushes For Cuts As Markets Expect A Hike

The prospect of higher US interest rates puts the Federal Reserve at odds with President Donald Trump. Trump has repeatedly called for lower borrowing costs, arguing that rate cuts could provide a major boost to the US economy.

The stronger inflation and employment data make that case more difficult. Three Fed officials dissented in favour of a rate hike at the July meeting, while officials including Governor Christopher Waller have indicated they could support a September increase if inflation fails to make meaningful progress.

Higher oil prices and inflation have also pushed US Treasury yields higher. With the latest inflation data captured before the most recent surge in fuel prices, policymakers face a heightened risk that energy costs could keep inflation elevated and force the Fed to maintain higher rates for longer.

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