A Fed interest rate hike looked all but locked in for next week after US inflation data came in broadly as expected on Friday, yet stock markets in London and New York still managed to close the day firmly in the green. The prospect of tighter monetary policy had weighed on sentiment earlier in the session, but a retreat in US government bond yields and oil prices from their intraday peaks gave equities room to recover.
The US Consumer Price Index (CPI), a measure of how fast prices are rising across the economy, is the key number traders watch before any Federal Reserve meeting. The Bureau of Labour Statistics said the CPI rose 3.4% year-on-year in August, matching the pace seen in July and in line with market consensus cited by FXStreet. On a monthly basis, consumer prices grew 0.4% in August, after a 0.1% rise in July.
What the inflation data means for the Fed interest rate hike decision
Excluding food and energy, the annual core CPI rate cooled to 2.4% in August from 2.5% in July, also in line with expectations. The monthly core reading was the one that surprised: prices rose 0.3% from July, above the 0.2% rise markets had pencilled in.
That fractional overshoot shifted the odds considerably. According to the CME FedWatch Tool, which tracks market bets on US interest rate moves, there is now an 87% probability that the Fed raises its fed funds rate by 25 basis points (a quarter of a percentage point) at its Wednesday meeting. The day before the data, that probability stood at 72%.
Analysts at Barclays commented: “Although some of the August strength seems one-off, we think the data are supportive of a rate hike next week. We maintain our call for the Federal Open Market Committee to deliver a 25bp hike at next week’s September meeting.”
EY-Parthenon is projecting the same move, according to CBS News, forecasting a 0.25 percentage point rise that would bring the federal funds rate to a target range of 3.75% to 4.00%. That target range would represent the highest level in the current cycle. Forbes notes that a hike to that range would mark the Fed’s first increase since July 2023, underscoring just how much ground this decision covers.
Not everyone is convinced the outcome is settled. Oxford Economics analyst Bernard Yaros said the decision “isn’t a slam dunk”, arguing that “a rate increase this month is still no guarantee, as the Fed’s preferred inflation measure will prove more benign.”
Dutch bank ING characterised any Wednesday hike as a “recalibration move” rather than the start of a fresh hiking cycle. ING analysts said they changed their view following Fed chair Kevin Warsh’s address at the Jackson Hole symposium and added: “Our projections for jobs and inflation suggest no need for a series of hikes.”
London markets close higher despite a bruising week
The FTSE 100 ended Friday up 41.52 points, or 0.4%, at 10,650.44, though the large-cap benchmark still fell 1.7% across the week, its worst five-day stretch since July. The FTSE 250 added 89.79 points, 0.4%, to 23,975.73, though it dropped 2.5% on the week. The AIM All-Share climbed 2.92 points, 0.4%, to 790.87, shedding 1.1% over the week. In Europe, the CAC 40 in Paris and the DAX 40 in Frankfurt each rose 0.8%.
In New York, the Dow Jones Industrial Average was up 1.0% at the time of London’s close, with the S&P 500 adding 1.1% and the Nasdaq Composite surging 1.3%.
Among individual stocks, Rightmove shares rose 2.9% after a regulatory filing showed activist investor Sachem Head had acquired roughly a 6.0% stake in the property portal. Trainline rose 1.8% after reporting resilient first-half trading, reiterating full-year guidance and announcing a new £100 million share buyback programme. Group net ticket sales were broadly flat year-on-year at £3.26 billion. Trainline reconfirmed guidance for financial 2027 net ticket sales of £6.2 billion to £6.45 billion. C&C surged 13% after agreeing to acquire Asahi UK’s wholesale interests for a nominal consideration.
The Bank of England announces its own rate decision on Thursday, the day after the Fed. Deutsche Bank analysts Sanjay Raja and Maui Brennan said they expect no change to the bank rate at 3.75%, but added that “the case for staying on hold is weakening slowly,” pointing to persistent energy prices, a resilient economy and upside risks around wage settlements.
UK gross domestic product (GDP) data released on Friday showed the economy grew 0.4% in July from June, accelerating from 0.3% growth in June and flat output in May, giving the Bank of England’s Monetary Policy Committee (MPC) fresh data to weigh before Thursday’s announcement.
