Federal Reserve Caught in 'Data Game': A 0.01 Percentage Point Could Influence Rate Decisions

The importance of this week's PPI and CPI lies in their ultimate impact on the Federal Reserve's judgment regarding PCE inflation trends.

The Federal Reserve's interest rate decision next week may depend on the inflation data released this week, with the final impact on the decision potentially differing by only a few tenths of a percentage point.

Market expectations are currently oscillating between raising rates and holding steady. Investors will focus on the Producer Price Index (PPI) released on Thursday and the Consumer Price Index (CPI) released on Friday. If the inflation data shows a significant uptick, it will strengthen the case for rate hikes; if monthly inflation shows signs of cooling, Fed officials may lean towards keeping rates unchanged.

CPI and PPI May Become Policy Watershed

Krishna Guha, head of economics and central bank policy at Evercore ISI, stated, "The rate decision will primarily depend on inflation data, but it will also be influenced to some extent by the expectations formed in the market after the data is released. The threshold for the Fed to raise rates has not been strictly defined at this point."

Wall Street economists expect the August PPI to rise by 0.4% month-on-month, with a year-on-year increase of 5.3%. For the CPI, the market anticipates an overall month-on-month increase of 0.4% and a year-on-year increase of 3.4%, with core CPI expected to rise by 0.2% month-on-month and 2.4% year-on-year.

However, the Fed's actual basis for monetary policy is not the CPI or PPI, but the Personal Consumption Expenditures Price Index (PCE). The data released this week will be used to estimate the PCE that will be published at the end of the month, helping decision-makers assess inflation trends.

Guha believes that if the core PCE corresponds to a monthly increase of about 0.21% or 0.22%, it may lead the Federal Open Market Committee (FOMC) to choose to hold steady; if it reaches 0.23% or 0.24%, it is "very likely to shift towards raising rates."

Guha candidly stated that such precise policy judgments down to 0.01 percentage points are "absurd." He and other Wall Street forecasters expect that the CPI and PPI data may ultimately point to a monthly PCE increase of 0.2% to 0.25%, meaning that a very small deviation could change the policy choice.

Warsh Faces Key Decision, Officials' Positions Not Aligned

This delicate policy environment also highlights the crucial role of Fed Chair Kevin Warsh in the September meeting.

Warsh publicly emphasized at the Jackson Hole annual meeting that the Fed has not achieved its 2% inflation target for more than five years. The market interprets this as a signal that he may push the FOMC to raise rates by 25 basis points on September 16.

However, there is no strong consensus on this in the market. As of Tuesday, market pricing shows a roughly 60% probability of a Fed rate hike, just around the usual threshold used to judge whether a central bank is likely to take action.

Guha expects the probability of holding steady to still be slightly higher than that of raising rates, but the outcome is far from certain. He stated that this judgment is based on the expectation that inflation data may be lower than anticipated, and while Warsh's demands for keeping rates unchanged have increased after his speech at Jackson Hole, they are "not so high as to be unattainable."

Recently, there has been a clear divergence in the positions of Fed officials. Hawkish officials like Cleveland Fed President Beth Hammack continue to advocate for rate hikes; Fed governors Christopher Waller, Michael Barr, and New York Fed President John Williams are more inclined to emphasize reliance on economic data for decision-making.

Hammack's predecessor, Loretta Mester, also stated on Tuesday that the Fed needs to raise rates to demonstrate its commitment to curbing inflation.

"I would indeed advocate for a rate hike," Mester said in an interview with CNBC. "I don’t think the Fed will necessarily raise rates. Chair Warsh needs to genuinely explain why they made the final decision, whatever that decision may be, at the press conference after the meeting."

PCE Revisions and Trump's Pressure Add Uncertainty

Even if this week's inflation data settles, there remains another layer of uncertainty in the Fed's policy judgment. Economists expect that the PCE will soon undergo revisions to several key indicators, potentially retroactively lowering previously reported inflation readings by several percentage points.

Therefore, the September decision may hinge on a very small data difference. Guha believes that if the market clearly bets on a rate hike before the meeting, and Warsh faces credibility pressure, then maintaining rates unchanged will become more difficult.

Meanwhile, Trump is also increasing the uncertainty in the policy environment. Last Friday, Trump threatened that if the Fed does not lower rates, he may cut trade with countries that maintain a trade surplus with the U.S. This action is seen by some as another attack on the Fed's independence and may, in turn, prompt policymakers to strengthen their stance.

Guha stated, "If the market prices in a clear advantage for a rate hike before the meeting, it will be difficult for Warsh to choose to hold steady. Thus, in this gray area, the market reaction itself may influence the final decision."

Currently, the key to the September meeting is not just whether "inflation is high or not," but rather where the PCE ultimately falls based on the CPI and PPI, and whether Warsh can persuade the divided officials to support the final policy choice.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.