Experts Predict No Fed Rate Cut Next Week: What It Means - Newsweek

Fresh inflation data have made a September interest-rate cut by the Federal Reserve even harder to justify, with economists telling Newsweek they predict either a rate hold or even a hike next week.

The latest Producer Price Index (PPI) and Consumer Price Index (CPI) data have provided two of the final major inflation readings available before the Federal Open Market Committee (FOMC) meets on September 15 and 16. PPI rose 0.4 percent in August, matching expectations, while its annual increase accelerated to 5.4 percent. CPI also rose 0.4 percent in August, with core CPI increasing 0.3 percent from the previous month, a firmer reading than economists had expected.

Rebel Cole, a finance professor at Florida Atlantic University, and Peter Ireland, an economics professor at Boston College, both expect the Fed to hold rates steady. Cole told Newsweek that policymakers are likely to wait for more evidence on the health of the labor market, while Ireland said the Fed appears willing to wait longer to see whether inflation continues moving toward its 2 percent target.

Meanwhile, Jeffrey Campbell, a professor of economics at the University of Notre Dame and a former senior economist and research adviser at the Federal Reserve Bank of Chicago, is more hawkish.

He predicts a rate increase, potentially by 50 basis points, arguing that inflation remains too high and that strong economic conditions give the Fed room to raise borrowing costs.

The latest PPI and CPI data could influence the outlook, particularly because they show inflation remains above the Fed's 2 percent target, with core consumer prices rising more than expected in August. But the economists said policymakers are unlikely to react mechanically to a single monthly reading, instead looking for a broader trend in inflation and the labor market.

Ireland expects the Federal Open Market Committee to repeat the pattern of its July meeting, when it left rates unchanged but had three members vote in favor of a quarter-point increase.

He said the central question facing policymakers is whether inflation will return to the Fed's 2 percent target on its own or whether higher interest rates will be needed to bring it down.

Ireland said recent comments from Fed Chair Kevin Warsh suggest the central bank is prepared to "wait a bit longer" for more evidence that inflation is moving in the right direction.

Federal Reserve Governor Christopher Waller made a similar argument in a September 3 interview. Waller said inflation remains above the Fed's 2 percent goal but that recent data showed signs of disinflation. He said he would favor holding rates if that improvement continued, while warning that a disappointing batch of August data could justify a rate increase at the September 15-16 meeting.

"I expect the Warsh Fed to stand pat next week and await additional data on the health of the labor market," Cole said.

"I predict a rate increase, possibly even 50 basis points," he said, pointing to inflation that has remained elevated and what he described as strong labor-market conditions and aggregate demand.

The latest inflation data showed continued price pressures in August, with both producer and consumer prices increasing during the month.

The Producer Price Index (PPI), which measures prices received by producers, rose 0.4 percent in August from the previous month, matching economists' expectations. On an annual basis, producer prices increased 5.4 percent, up from 4.8 percent in July and slightly above forecasts.

The Consumer Price Index (CPI), which measures the prices consumers pay for goods and services, also increased 0.4 percent in August. Headline CPI rose 3.4 percent from a year earlier.

Core CPI, which excludes food and energy prices and is closely watched as a measure of underlying inflation, increased 0.3 percent from July and was up 2.4 percent over the previous year. The monthly core reading was hotter than economists had expected.

Taken together, the data show inflation remains above the Federal Reserve's 2 percent target, with the latest core CPI reading providing a particular sign that underlying price pressures remain persistent.

The latest inflation figures could make it harder for the Federal Reserve to justify cutting interest rates at its September meeting, but they do not necessarily mean a rate hike is now the most likely outcome.

The economists nevertheless cautioned against treating either inflation report as decisive on its own.

"All FOMC members realize that monthly CPI and PPI statistics are very noisy," Ireland said. "Whether they come in hot or cold matters, but only to the extent that they form an intermediate-term pattern one way or the other."

The latest figures therefore strengthen the case for caution, rather than providing a definitive signal for the September decision. With inflation still above target and the labor market also in focus, the economists' forecasts remain split between a rate hold and a possible hike.

The latest data give hawkish policymakers more ammunition, but the economists couldn't agree on how much weight the Fed should place on the reports.

PPI was broadly in line with expectations on a monthly basis, although the annual increase was stronger than expected. CPI also showed continued inflation pressure, with headline prices rising 0.4 percent in August and core prices increasing 0.3 percent.

Cole noted that oil prices have remained elevated amid geopolitical tensions, making the Fed's preferred focus on core inflation—excluding volatile food and energy prices—particularly important.

"Oil prices have remained elevated since hostilities with Iran began in March; Diesel has been especially high and this has been exacerbated by Ukraine’s damage to Russian refineries," he said. "So the focus will be on 'core' inflation ex energy, not the 'headline' numbers."

Cole said that if inflation data showed continued acceleration, the Fed could make a "pre-emptive" 25-basis-point hike.

The latest figures make that possibility more plausible, but Cole nevertheless expects the FOMC to hold rates next week and await additional evidence on the labor market.

Campbell remains more hawkish. He predicts a rate increase, potentially by 50 basis points, arguing that inflation remains elevated and that strong economic conditions give the Fed room to raise borrowing costs.

But he also cautioned against treating any single monthly report as decisive. Even though PPI and CPI were hotter than expected, he said it told him "nothing" about the immediate decision because month-to-month movements can be dominated by noise.

The latest data illustrate that tension: Inflation remains above target, but the reports alone may not be enough to determine whether policymakers move rates at the September meeting.

The experts had previously agreed that if the CPI and PPI figures had been unexpectedly cool, it would not have led to a cut.

"Cooler-than-expected numbers would not lead to a cut," Cole told Newsweek ahead of the PPI and CPI release. "Inflation remains stubbornly above the FOMC’s target of 2% and the FOMC’s preferred measure of inflation (PCE) doesn’t come out until after next week’s meeting. I expect the FOMC to stand pat and await additional data.

For ordinary Americans, the effect of the Fed's decision depends heavily on the type of financial product involved.

A rate hike generally makes borrowing more expensive, particularly for products tied closely to short-term interest rates. That can mean higher costs for credit-card balances, some auto loans and other variable-rate borrowing.

"Families who rely on credit to maintain their standard of living will pay more for that service," said Campbell. The objective, he argued, would be to reduce borrowing and demand enough to bring inflation back toward the Fed's 2 percent target.

But Cole cautioned that the relationship between the Fed's policy rate and mortgage rates is more complicated.

He pointed out that mortgage rates are more closely connected to the yield on the 10-year Treasury than directly to the federal funds rate. Consequently, a Fed hike does not necessarily mean mortgage rates will rise by the same amount—or even rise at all.

"A rate hike now might very well result in the yield on the 10-year falling rather than rising," Cole said, if investors interpreted the move as evidence that the Fed was taking inflation seriously.

The same dynamic could affect commercial real estate and other forms of long-term borrowing.

Higher interest rates can benefit savers as well as hurt borrowers.

When the Fed maintains or increases its policy rate, banks and other financial institutions may offer higher yields on some savings accounts, certificates of deposit and other interest-bearing products. But the speed and size of those changes vary by institution and product.

For households carrying significant credit-card debt, however, higher rates can outweigh those benefits.

A hold would leave borrowing conditions broadly where they are, while allowing the Fed to wait for additional evidence on inflation and employment before deciding whether another move is necessary. A cut, by contrast, would generally ease financial conditions, but the experts interviewed for this story do not expect that to happen next week.

Businesses could also feel the effects of a change in interest rates, particularly companies that rely heavily on bank financing.

But Cole said a quarter-point increase would probably not be enough by itself to materially alter conditions for most small businesses.

"A 25 b.p. increase in the rate on a term loan or line of credit is not going to have a material impact on small businesses," he said, even if banks pass the increase on to borrowers.

Campbell similarly expects much of the demand reduction from higher rates to come through households rather than major corporate investment.

He said large capital-investment projects, including AI-related investment, are likely to continue, while some barely profitable businesses could contract.

The distinction matters because the Fed's policy rate is intended to influence overall economic demand rather than simply determine the cost of every business loan or mortgage.

The September decision comes against the backdrop of pressure from President Donald Trump for lower interest rates.

But the economists differed somewhat in their assessment of how much political pressure is influencing the Fed.

Campbell said the central bank is ignoring the administration's calls for rate cuts.

"The Fed is looking past the administration's 'request' for rate cuts," he said, adding that he believed Warsh could handle the president.

Cole was more direct about the potential political consequences.

"The president has been pressuring the FOMC to lower rates since he was reelected," he said. "A rate hike will not improve relations between the White House and the FOMC."

Ireland, however, said he does not currently believe politics are shaping the FOMC's decisions.

He argued that the economic debate is ultimately about above-target inflation and the health of the economy. If higher rates become necessary later this year or next year, Ireland said he believes the costs could be justified by the benefits of restoring inflation to the Fed's 2 percent goal.

"My guess is that President Trump and Treasury Secretary Bessent know this, too, and will support Chairman Warsh if he decides those rate increases are necessary," Ireland said.

The economists' forecasts point to a Fed that is likely to wait rather than rush into another rate move next week.

Ireland and Cole both expect a hold, while Campbell predicts a hike and believes the central bank could increase rates by 50 basis points, or half a percentage point.

The PPI and CPI reports could shift that balance, particularly as they show that inflation remains elevated, with producer-price inflation accelerating and core consumer inflation coming in hotter than expected. But the experts largely agree that policymakers are unlikely to react mechanically to a single monthly inflation number.

Instead, the Fed will be looking for a sustained trend.

For consumers, that means next week's decision may be less about an immediate change in the price of a mortgage or credit-card payment and more about the direction of interest rates—and inflation—for the months ahead.

The FOMC is scheduled to announce its decision on Wednesday, September 16.