October Fed meeting hinges on this key economic data, Citi says

Investing.com -- Markets are already pricing more than 50% odds of a Federal Reserve rate hike at the October FOMC meeting, and Citi economist Andrew Hollenhorst argues that only one data point has a realistic chance of stopping it: September's core CPI print.

Hollenhorst's view is that the October meeting is shaping up as a near-replay of September, when a hotter-than-expected August inflation reading was the decisive trigger.

"The Fed's reaction function has become more sensitive to spot inflation data and energy prices," Hollenhorst wrote, framing the dynamic that now dominates the central bank's decision-making.

Citi forecasts 85,000 new payrolls in the upcoming Friday's jobs report and expects unemployment to tick up from 4.1% to 4.2% — figures Hollenhorst explicitly says would fall short of moving the needle on hike pricing. Only a dramatically weaker outcome would change the calculus:

"A negative payroll reading or a 4.3% unemployment rate are certainly possible and could shift the market implied likelihood of a hike lower."

That sets up September's CPI release as the true swing factor. Citi sees genuine scope for a softer reading, citing the composition of August's surprise. "We see potential for a cool reading (0.2%MoM or slower) given the slowdown in persistent components like shelter and given that the strength in August was in volatile and cell phone service plans," Hollenhorst said.

In August, core CPI registered 0.3% month-over-month against expectations of 0.2%, which Citi says "pushed markets to price and the Fed to follow through with a 25bp rate hike" at the September FOMC meeting. A return to 0.2% or below on the September print would offer the clearest argument for the Fed to hold in October.

A scheduled revision to core PCE inflation, expected to show a substantial downward adjustment, is unlikely to provide much relief, Hollenhorst cautioned. "It is not clear this will significantly change Fed policy plans or market pricing given it should be expected," he wrote.

Citi notes that it and most other forecasters anticipate the revision is at least "dovish on the margin," but because it is already widely anticipated, its capacity to shift policy thinking is limited. There is, however, a camp within the Fed that may already be leaning toward patience.

"Some officials may prefer waiting to hike again in any case, given most penciled in 50bp of total hikes this year and a desire to watch how the significant rise in Treasury yields is affecting the economy."

Citi draws a direct parallel to the run-up to the September meeting, when Fed Governor Waller indicated he would support holding policy rates steady as long as August inflation data cooperated — a conditional posture that now maps onto October.

Original Article

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