The Federal Reserve’s interest rate decision next week could hinge on just a few one-hundredths of a percentage point and ultimately on inflation data they won’t see until after they vote. As markets vacillate between which way they think policymakers will lean, all eyes will turn to releases on August producer and consumer prices — Thursday and Friday respectively. Should the data come in hot, that would argue for a rate hike. Conversely, if inflation, at least on a monthly basis, appears to be cooling, Federal Open Market Committee voters may be content to hold, judging by statements in recent days from key officials. The difference between either posture is likely to be miniscule, with Chairman Kevin Warsh left to take a side and persuade his fellow officials. “The rate decision will then turn mostly on the inflation data but also to some degree on where market expectations settle post-release,” Krishna Guha, head of economics and central bank policy at Evercore ISI, said in a note. “The bar for a Fed hike is not tightly pinned down.” Big reports on tap With Fed officials publicly debating about where they think policy should head, there’s another wrinkle in the September debate: The inflation data released this week, while closely watched, aren’t what the Fed officially uses to set policy. That would be the personal consumption expenditures price index. “This precision is ludicrous,” Guha said, arguing that if core PCE, which excludes food and energy, lands around 0.21% or 0.22%, that would tilt the FOMC toward a hold, while an implied 0.23% or 0.24% level “could well go to a hike.” Information from both indexes will be used to estimate the PCE level, released at the end of the month, and thus to calibrate policy. Guha and other Wall Street forecasters expect the CPI and PPI data to point to a monthly PCE reading between 0.2% and 0.25%. In Guha’s view, a slight deviation in either direction could make all the difference. “With Warsh’s credibility under pressure, it will be tough to hold if the market prices a hike as clearly odds-on eve of the meeting,” Guha added. “So in the grey zone reflexivity and the market response could tip the decision.” As for this week’s readings, economists surveyed by Dow Jones expect a headline PPI monthly increase of 0.4%, putting the annual rate at 5.3%. PPI is generally considered a barometer of wholesale prices. For consumer prices, the consensus is 0.4% on monthly headline and 0.2% on core, with respective annual rates of 3.4% and 2.4%. Inside the numbers Yet another wrinkle: The PCE reading soon will face revisions for a couple of key metrics, which economists see shaving a few tenths of a percent off inflation readings retroactively. That the final decision on rates could rest on a such a small margin of error is characteristic of the nascent Warsh regime, in which the chairman’s oft-stated disdain for tipping the Fed’s hand on rates leaves market participants left to guess what will happen. Guha sees a hold as more likely, though far from certain. “Our working hypothesis overall, heading into the week, we still think a hold is fractionally more likely than a hike,” he said. “This reflects our view that the inflation data is likely to break on the cooler side and that the bar for a hold is higher than it was pre-Jackson Hole but not impossibly so.” In his most recent public statements , Warsh emphasized his displeasure that the Fed has missed its 2% inflation target for the past five-plus years. Markets took the remarks, made at the central bank’s annual symposium in Jackson Hole, Wyo ., as an indicator that Warsh will push for a quarter percentage point hike when the committee votes Sept. 16. However, conviction is low, with market pricing on Tuesday indicating a 60% probability of a rate increase — a level generally considered a rule-of-thumb dividing line for whether the Fed will move on rates. Another wildcard: President Donald Trump on Friday threatened to cut off trade with countries that have a surplus against the U.S. if the Fed doesn’t cut, a move seen in some circles as yet another attack on the Fed’s independence that could harden policymakers’ positions. Recent days have seen a split among Fed officials. Hawks such as Cleveland Fed President Beth Hammack are continuing to push for hikes, while a contingent that includes Fed Governors Christopher Waller and Michael Barr, along with influential New York Fed President John Williams , have leaned dovish in advocating for a data-dependent approach. Hammack’s predecessor, Loretta Mester, said Tuesday she also thinks the Fed needs to hike to show it’s serious about inflation. “I would really be arguing to raise rates,” she said in a CNBC interview. “I don’t think it’s necessarily built in that the Fed is definitely going to move rates up. The onus is on Chair Warsh when he comes out of that meeting and holds this press conference to really give us the case for why they decided to do what they did, whatever that decision is.”
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