"The headline (June inflation and labor market) data may look weaker but those disruptions are look-through events," Diane Swonk, chief economist at KPMG U.S., posted on X on Wednesday. "September is still a live meeting for a hike."
To be sure, historical precedent argues against a hike next month.
The Fed rarely hikes rates so soon after a weaker-than-expected nonfarm payrolls report. According to Warren Pies, founder of 3Fourteen Research, this has only occurred at two of the last 89 Fed meetings that have followed pre-revision monthly job losses – and you have to go back decades to November 1999 and November 2005.
Interest-rate futures markets also suggest a hike next month is unlikely, but with roughly one-in-three odds, the probability is not negligible.
The political calendar is also a consideration. Fed members probably won't want to leave themselves open to accusations of political interference by raising rates in October, just days before the November 3 midterm elections. That makes December more likely, but could also keep September in play.
The question is whether June's surprisingly soft inflation readings are a blip, or the beginning of a more sustained trend. As "many" Fed officials noted at the July meeting, the re-escalation of war in the Middle East has "significantly" clouded the inflation outlook. Prolonged conflict – which appears very likely at this point – will put supply chains under even greater stress.
Indeed, energy prices are already rising again. Crude oil LCOc1 is now 35% higher than it was a year ago, after retreating significantly following the U.S.-Iran memorandum of understanding on a ceasefire in June.
Perhaps even more importantly, the prices of refined oil products – which are what households and businesses actually consume – are facing severe upward pressure. They are likely to remain elevated even if Washington and Iran agree to a permanent ceasefire because of the reduction in global refining capacity. Most notably, the price of diesel, the fuel that powers America's factories, industry and agriculture, is now near the highest on record.
Fed-watchers will now turn their attention to next week's symposium in Jackson Hole and incoming inflation and employment data, starting with the July PCE inflation report. It won’t take much of a hawkish surprise to make the September meeting truly "live."
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