Fed rate hike is about Wall Street, not inflation, says economist
Economists are debating whether the Federal Reserve's potential interest rate hike is driven by actual inflation data or a desire to appease Wall Street expectations. Critics argue that current inflation metrics do not justify a hike, suggesting the move is a performative gesture to align with market sentiment.
Why it matters
This highlights the tension between central bank policy independence and the influence of financial market expectations on monetary decision-making.
One of the last holdouts on Wall Street, Goldman Sachs, late Friday, rescinded its forecast that the Fed would stay on hold next week.
“While today’s CPI report only raised our August core PCE forecast slightly to 0.26% and has not changed our fundamental inflation view, we think that the FOMC will want to avoid the market reaction that would likely follow from remaining on hold when the market is pricing a nearly 90% chance of a hike,” said the bank .
It was two years ago — in September 2024 — that the Fed embarked on a rate-cutting cycle with annual core CPI running at well over 3%. Not only that, but the central bank saw fit to slash its benchmark fed funds rate by 50 basis points that month, instead of the assumed 25.
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