The Federal Reserve’s September 16 policy decision is likely to hinge on August consumer-price data due Friday, as Chairman Kevin Warsh reiterated the central bank’s 2% inflation target. Markets currently price a 59% probability of a 25 basis point rate increase, according to LSEG, after bets briefly reached 61% and stood around 50% earlier. If the Fed does not move in September, October and December remain possible windows for a hike.
The August employment report, released the previous Friday, showed 162,000 jobs added, about triple the 53,000 expected by analysts polled by The Wall Street Journal. The report strengthened the case for tighter policy but did not make a September increase certain, according to JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management. She said the decision is essentially a coin flip and will likely be determined by the upcoming inflation data.
Analysts polled by The Wall Street Journal expect August headline annual CPI to be 3.4%, unchanged from July, while core annual CPI is expected to slow modestly to 2.4% from 2.5%. A hotter print would make a September hike more likely, while softer data could support leaving rates unchanged, Bianco said. She added that the debate is increasingly about timing rather than direction, with markets still pricing a high probability of at least one additional hike before year-end.
Bond-market conditions have added pressure. The 10-year Treasury yield reached its highest level in almost three years, and some investors are discussing long-end yields above 5%. The U.S. Treasury recently announced it would double buybacks of long-dated debt to at least $4 billion per operation, up from $2 billion. Bianco said the $4 billion level should not be viewed as a ceiling.
She attributed the yield increase to a sustained repricing toward a higher-yield environment rather than a panic move, noting that long-dated government bond yields are near multi-year highs across the U.S., Europe, Japan and the U.K. Large deficits and elevated Treasury issuance are forcing investors to demand higher compensation for holding long-duration debt, a term premium. Drivers also include fiscal-policy concerns, heavy government-bond issuance, competition from corporate issuance by large technology companies, uncertainty over inflation and rates, and thin end-of-summer liquidity.
BondBloxx expects a higher-for-longer rate environment and a steeper yield curve, and favors short- to intermediate-dated U.S. Treasurys over longer-dated bonds. Lower long-term yields would require meaningful fiscal improvement, slower growth in issuance, a Treasury funding tilt toward short-term bills, or softer economic data that allows lower rates without reigniting inflation, Bianco said.
