The likelihood of a Federal Reserve interest-rate increase next month rose after government data showed a slight pickup in inflation in July.
The Commerce Department’s Personal Consumption Expenditures price index, the Fed’s preferred inflation gauge, rose 3.7% from a year earlier, up from 3.6% in June. Core PCE inflation, which excludes food and energy, held at 3.3% on an annual basis, matching the prior month’s reading.
Fed funds futures traders increased the probability of a September rate hike to about 44%, according to market pricing compiled after the report. That compares with roughly 36% just before the data release. Traders also priced in a near-certain expectation that the Fed will raise rates at least once by year-end.
The Fed has maintained its policy rate in a 3.50%-3.75% range since December, pausing after a series of aggressive hikes to assess incoming economic data. The latest figures suggest inflation remains above the central bank’s 2% target, though core inflation showed no acceleration.
Fed Chairman Kevin Warsh has yet to signal a clear path forward, according to observers. Heather Long, chief economist at Navy Federal Credit Union, noted that while the data buy time for further assessment, the Fed must clarify its criteria for additional tightening.
"The United States still has an inflation problem," Long said. "The latest data give Warsh time to wait and see, but he has to be more clear about what he's watching closely and what it would take for him to hike rates."
