If the core CPI reaches 0.3%, the suspense over the Fed's October rate hike is revealed

According to Woofun AI, Federal Reserve officials recently sent signals that tend to suspend interest rate hikes at the October 27-28 meeting and postpone the next policy action until December. However, this easing expectation is facing a severe test, and the September consumer price index (CPI) data to be released on Wednesday will be a key variable in determining the direction of monetary policy. If inflationary pressure continues to increase, the Federal Reserve may be forced to restart interest rate hikes at the end of October; conversely, if the data is moderate, officials have more reason to keep interest rates unchanged.

It is worth noting that the political context in which the midterm elections are approaching is also seen as one of the important factors that the Federal Reserve wants to suspend action this month.

The month-on-month increase in core CPI is the focus of market attention, as indicators excluding food and energy prices better reflect potential inflation trends. Economists generally expect the core CPI to rise 0.2% month-on-month in September, down from 0.3% in August; the year-on-year increase is likely to rise from 2.4% to 2.5%. If the data is in line with expectations of 0.2%, the market's bets on the October rate hike will not increase significantly, and the focus will shift to the December meeting. As of now, Wall Street traders expect only 17% of the probability that the Federal Reserve will raise interest rates in October. Bank of America Securities (BAC.US) American economist Stephen Juno pointed out that the 0.2% month-on-month increase in core CPI will not push up expectations of interest rate hikes.

However, Avery Schenfield, chief economist of capital markets at the Canadian Imperial Bank of Commerce (CM.US), has the opposite view. He expects the core CPI to rise 0.3% month-on-month, and believes that the Federal Reserve will raise interest rates this month. Schenfield stressed that there are still too many projects growing at a rate of more than 3%, which poses an upward risk.

According to data compiled by Woofun AI, this divergence of expectations directly reflects the market's different judgment on the stickiness of inflation. The slight difference between 0.2% and 0.3% is enough to change the policy path.

Overall inflation is facing greater upward pressure. The Wall Street Journal's survey of economists shows that due to rising energy prices, the overall CPI may rise 0.6% month-on-month in September, the fastest growth rate in five months; the year-on-year increase is expected to rise to 3.7% from 3.4% in August. Federal Reserve officials will also focus on the Producer Price Index (PPI) on Thursday. Both CPI and PPI data will affect the Federal Reserve's favorite inflation indicator, the personal consumption expenditure (PCE) price index. The inflation data is not only related to whether to raise interest rates in October, but also affects the market's judgment on the extent of subsequent austerity.

The vast majority of Federal Reserve officials expect another rate hike this year, and quite a few believe that another rate hike is possible in 2027. The market has now taken into account the expectation of a cumulative three rate hikes, which will reverse the three interest rate cuts implemented by the Federal Reserve at the end of 2025. Piper Sandler (PIPR.US) central bank policy director Kurt Lewis predicts that the Federal Reserve will raise interest rates a total of three times before evaluating inflation prospects. He believes that this path of austerity will not hurt the US labor market. Lewis notes that Federal Reserve officials expect core PCE inflation to fall to 2.5% by 2027.

If future data does not show this improving trend, the Federal Reserve may continue to raise interest rates. Lindsey Piguza, chief economist at Stifel Financial (SF.US), believes that it will take at least three to four interest rate hikes to control inflation. There are still differences within the Federal Reserve over the outlook for inflation. Some officials worry that price pressure will rise further, while others believe that as the impact of tariffs subsides and energy prices stabilize, inflation will gradually cool down.

As a result, Wednesday's core CPI data became an important watershed in the recent monetary policy path. If the data is moderate, the Federal Reserve is expected to postpone interest rate hikes until December to provide breathing space for the economy; if price pressure exceeds expectations, the possibility of tightening the policy again this month will increase, even triggering expectations of interest rate hikes at the end of October and many subsequent austerities.

This decision will not only affect short-term market sentiment, but will also reshape investors' judgment on long-term interest rate paths. In the context of the intertwining of tariff effects and energy price fluctuations, any deviation in inflation data may be interpreted by the market in amplification. The Federal Reserve needs to find a delicate balance between controlling inflation and supporting economic growth, and Wednesday's data will provide key clues. For market participants, paying close attention to the degree of divergence between core CPI and overall CPI, as well as subsequent verification of PPI data, will be a key strategy for dealing with policy uncertainty.