Markets see nearly 90% chance of Fed rate hike next week

Traders priced about an 86.9% chance that the Federal Reserve will raise interest rates at its meeting next week after August inflation ran hotter than economists expected. The votes at the Federal Open Market Committee are scheduled for Wednesday.

Core consumer prices, which exclude food and energy, rose 0.3% month over month in August versus the 0.2% that had been forecast. Gasoline prices climbed 3.9% in the month. The stronger readings have led some officials and market participants to reassess the outlook for policy tightening.

The market odds come after Fed Governor Christopher Waller said a hotter inflation print would put a rate increase back on the table. In July, three Fed officials voted in favor of a rate rise when the committee left policy unchanged, indicating some internal pressure to tighten.

Kevin Warsh, President Trump’s appointee and the Fed chair sworn in on May 22, will cast his first formal vote as chair at the upcoming meeting. Warsh has overseen two policy meetings, in June and July, that ended with no change to the policy rate. President Trump has publicly sought lower rates and had indicated a preference for a policy rate near 1%.

Economic data since Warsh took office have been mixed. The August jobs report showed payrolls rose by 162,000, the unemployment rate held at 4.1% and labor force participation edged higher. Some economists point to those figures and recent inflation prints as support for tighter policy, while others argue energy-driven price spikes explain part of the August rise in inflation.

Heather Long, chief economist at Navy Federal Credit Union, said the risk is that inflation becomes more entrenched or broadens across categories and that officials may want to avoid delaying a response. Economists at UBS now expect two rate increases this year. Daniel Lacalle, chief economist at Tressis, argued a rate hike would have limited impact on energy-driven prices and could weigh on job creation and investment.

Markets reacted quickly to the inflation data: interest-rate futures moved to price in a higher probability of a hike, while gold and bitcoin briefly fell before recovering. The immediate debate among officials centers on whether the August inflation rise reflects temporary energy-price moves or broader underlying pressure that would require policy tightening.