Yesterday’s report of a slight uptick in inflation has pushed odds higher for a December interest rate increase from the Federal Reserve.
The report, however, had no effect on odds in the Fed Funds Futures market for an increase at the Fed’s September 20 meeting. Those odds remain at 98.6% in favor of no change in rates. Odds for interest rates staying the same at the Fed’s November 1 meeting stand at 94.7%, according to the CME’s Fed Watch tool.
Yesterday’s report from the Bureau of Labor Statistics put headline Consumer Price Index inflation at an annual 1.9% rate after a 0.4% increase in prices in August. Most of that increase came from energy prices, which climbed 2.8% in the month.
The core inflation rate, which excludes volatile food and energy prices, rose 0.2% in August to a 1.7% annual rate.
The Federal Reserve has set an inflation target of 2%.
The market consensus right now is that there won’t be any interest rate increase from the Fed at next week’s meeting but that the U.S. central bank will announce a plan to reduce the size of the Fed’s $4.4 trillion balance sheet. The plan outlined earlier by the Fed would start with letting Treasuries and mortgage-backed assets in the Fed’s portfolio mature without buying new assets to replace them. The initial move would result in reducing the Fed’s balance sheet by $10 billion a month.