Fed likely to keep rates steady despite August CPI uptick, asset managers say

The consumer price index rose 3.7% in August from a year earlier, but the overall pricing trends may remain positive enough for the Federal Reserve to decide to keep interest rates steady when it meets next week, asset managers said.

Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, said the jump in headline CPI, which was driven by the jump in gasoline prices, was generally expected.

"While these numbers do not change our, and the market's, expectations that the Fed will hold the target Fed Funds rate unchanged at the September meeting, the slightly stronger number can influence the tone of the press conference and Summary of Economic Projections," he added. "We continue to expect some reduction in the number of participants projecting further hikes, but probably not enough to move the median projection of one more rate hike. That said, we believe that we have likely seen the last rate hike for this cycle, as the economic data that the Fed will see over the coming months will keep them on hold and allow the impact of 5.25% of prior hikes to slow the economy and inflation."

Janus Henderson has about $322 billion in assets under management.

Brad Conger, deputy CIO at Hirtle Callaghan & Co., noted that while the Fed's battle to cool inflation is not over, the numbers are trending in the right direction.

"The (August) figure does not help the Fed's case that the risks are balanced," he said. "Inflation is at least stubborn and, at worst, perhaps inflecting higher. In general, the trends are favorable, but just at the margin the August CPI suspends the 'golden path' that FOMC members have used to describe ebbing inflation absent a cost to growth."

Hirtle Callaghan has $18.5 billion in assets under management.

Seamus Smyth, chief economist of Virtus Investment Partners, said that nothing in the August CPI data overturned the idea of gradual underlying moderation in inflation.

"CPI was okay this morning, though certainly not as good as the past two months," he said. "It wasn't a huge surprise relative to my expectations, and I'd currently put the underlying inflation run-rate in CPI terms at about 3%, clearly above the Fed's target but much less worrying than when it was well north of 5%, with some further drift down still likely over the rest of the year."

Virtus has $169.4 billion in AUM.

The 3.7% increase in CPI for August reported by the Bureau of Labor Statistics on Sept. 13 was slightly above expectations and above the 3.2% annualized rise recorded in July.

Economists were expecting a 3.6% annualized CPI figure for August, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, the core CPI rose by an annualized 4.3% last month.

The Federal Reserve has considered the inflation rate a key factor in its monetary policy.

The Fed's key short-term interest rate is now in a range of between 5.25% to 5.5% — after the central bank hiked rates by 25 basis points at its July 26 meeting.

As of the morning of Sept. 13, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is a 97% probability that the Fed will keep rates unchanged when it issues its next monetary policy decision on September 20, and only a 3% probability it will hike rates by 25 basis points, according to CME Group's FedWatch tool.

Brian Nick, senior investment strategist at Trahan Macro Research, said a pause on rate hikes in September by the Fed "seems like a done deal" given the recent cooler labor market reports.

"This gives the Fed another month and a half of data to consider before it has to choose whether to hike rates on November 1, by which time this morning's (CPI) report will be old news," he added.