Markets are still trying to figure out the Fed’s next move

New York —  

Will the Federal Reserve raise interest rates or hold them steady at its meeting next month?

For the market, it’s a coin flip: Odds of a rate hike in September are near 50%, while odds of keeping rates steady are near 50%, according to CME FedWatch, a real-time forecasting tool.

Volatile job numbers, stubborn inflation and changes to the Fed’s communications style are all stirring up uncertainty in markets and raising the stakes for upcoming economic data releases — including this week’s inflation report.

Traders are looking to Consumer Price Index data on Wednesday for more guidance on whether inflation is cooling or remaining sticky. The surge in energy prices because of the war with Iran has raised expectations for higher Fed rates by year-end, but the market remains divided on the timing of any rate hikes, while new data continues to shift bets.

Markets are pricing in a 50% chance that the Fed holds rates steady in September, but it’s a change from one week ago, when the odds for a rate hike were at 67%. The reason for the shift? Last week’s employment report unexpectedly showed the US economy lost 23,000 jobs in July, moving the odds in favor of holding rates steady.

But the upcoming inflation report could move those odds again.

Consensus estimates are for 3.4% annual headline inflation in July, down slightly from 3.5% in June. Furthermore, estimates are for core CPI, which strips out energy and food prices, to come in at 2.5% in July, down from 2.6% in June. Any surprise of hotter-than-expected inflation could prompt traders to ramp up bets on a rate hike in September. But an in-line report, or cooler-than-expected inflation, could reaffirm bets for keeping rates steady.

Source: CNN Business