Fed rate hike call seen tight as inflation heats up
Summary
The Federal Reserve is facing a closer-than-expected decision on an interest-rate hike in Washington later this month after consumer prices rose 3.7 percent year over year last month. Gasoline prices linked to the Middle East war drove part of the increase, while broad-based price pressures also emerged in software and toys. Interest-rate futures now imply roughly even odds of an October hike as policymakers weigh persistent inflation against a cooling labor market.
Key Facts
- Core consumer prices, excluding food and energy, rose 2.6 percent year over year, exceeding economists’ 2.5 percent projection.
- The Fed raised its policy-rate target range to 3.75 percent-4.00 percent in September.
- Software prices increased 28 percent from a year earlier, the largest increase ever recorded in the data, while toy prices also posted a record rise.
- The Federal Open Market Committee is scheduled to meet October 27-28.
- Fed officials are weighing whether further tightening could unduly slow the labor market as job gains cool despite low unemployment.
View of the facade as construction continues on the Federal Reserve Board building, in Washington, D.C., Sept. 17, 2025. Reuters-Yonhap
A Federal Reserve interest-rate decision later this month may be a closer call than previously thought after Labor Department data showed consumer prices were up 3.7 percent last month from a year earlier, well above the Fed's 2 percent target and moving in the wrong direction.
Higher gasoline prices from the Middle East war were a main driver. Excluding volatile food and energy prices, the core Consumer Price Index (CPI) was up 2.6 percent, more than the 2.5 percent economists polled by Reuters had projected.
The Fed lifted the policy rate in September to a target range of 3.75 percent-4.00 percent to bring down too-high inflation, and officials have said they are looking closely for signs of broadening price pressures that could keep inflation high even if gas prices fall, necessitating more policy tightening. Wednesday's data contained plenty of such signs.
"The surprise was not concentrated in any one item, like it was with wireless in the August report, but instead reflected a number of components showing strength, i.e., it was broad-based," wrote Omair Sharif, founder of Inflation Insights.
Software prices were up 28 percent from a year earlier, the largest increase ever, and toy prices also notched a record rise, the data showed -- emblematic of inflationary impulses from both AI-driven demand and higher tariffs under the Trump administration.
"This means that inflation is broadening out, something that is not a good omen for the Fed and would raise the probability for an increase in rates at the end of the October FOMC meeting," wrote Raymond James Chief Economist Eugenio Aleman, referring to the Fed's rate-setting Federal Open Market Committee, which next meets October 27-28.
In recent weeks several of the Fed's most influential policymakers have signaled there's time to weigh more data before delivering what most believe will be at least one more rate hike by year's end, and traders had bet heavily against a second straight hike under Fed Chairman Kevin Warsh -- especially just a week before November elections that will decide if Trump's Republican party holds on to majorities in Congress.
After Wednesday's economic data, interest-rate futures are priced for around even odds of an October rate hike, a place of unusual uncertainty around the outcome of a Fed decision just two weeks away.
Fed policymakers are also weighing the risk of tightening too fast and unduly slowing the labor market. Unemployment has been low, but job gains have also cooled.
"September CPI keeps inflation concerns alive, with core inflation still sticky, but weaker jobs data and fragile consumer sentiment mean the Fed still has room to hold in October," PPHC Chief Economist Martin Beck said.
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