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Fed Considers Rate Hike Amid Rising Inflation and Energy Costs
Confirmed
In Short: The Federal Reserve is set to raise interest rates, amid rising inflation and energy costs, as New Zealand's central bank also considers further hikes.
New Zealand's central bank, the Reserve Bank of New Zealand (RBNZ), raised its Official Cash Rate by 0.25 percentage points to 2.75%, signaling that another increase may be necessary before the end of the year. Inflation remains a significant concern, with the inflation rate excluding vehicle fuels easing to 2.9%, while longer-term inflation expectations remain close to 2%. Higher energy costs are squeezing household budgets and weighing on domestic spending, leaving policymakers in a delicate position.
Inflation in both New Zealand and the United States remains elevated, driven by higher energy prices. The US August jobs report, which showed a strong labor market, triggered a hawkish repricing in rates markets, leading to expectations of a rate hike by the Federal Reserve. The US government bond yields have been rising, with the 10-year Treasury yield reaching its highest level since 2007, driven by concerns about inflation caused by the oil price surge since the start of the US-Israel war with Iran.
Meanwhile, the Russian government has been trying to expand the scope of any potential energy truce to include core demands such as the lifting of sanctions and the protection of its energy trade. Kremlin spokesman Dmitry Peskov stated that any easing of fuel markets would not happen without ensuring the safety of Russian fuel tankers and the lifting of sanctions against Moscow's energy exports. This has added to the complexity of the situation, as neither the Russian nor Ukrainian governments have agreed to the energy cease-fire proposed by US President Donald Trump.
Markets are heavily anticipating a rate hike by the Federal Reserve, with bond markets signaling for weeks that higher interest rates may be needed. While the rise in borrowing costs has been orderly this year, they could remain elevated if geopolitical tensions and high energy prices remain a significant concern. The global benchmark wholesale oil price has risen to over $109 a barrel, up from around $86 at the end of August, further fueling inflation concerns.
Government bond yields have been rising globally, driven by worries that inflation caused by the oil price surge will lead to higher interest rates. The effective interest rate on US government bonds over 10 years, known as the 10-year Treasury yield, rose as high as 5.04% but has since eased back. The Federal Reserve's decision and guidance on interest rates will be particularly important for the US dollar, as markets increasingly expect higher rates to combat inflation.
What's confirmed
- New Zealand's central bank, the Reserve Bank of New Zealand (RBNZ), raised its Official Cash Rate by 0.25 percentage points to 2.75%, signaling that another increase may be necessary before the end of the year. Inflation remains a significant concern, with the inflation rate excluding vehicle fuels easing to 2.9%, while longer-term inflation expectations remain close to 2%. Higher energy costs are squeezing household budgets and weighing on domestic spending, leaving policymakers in a delicate position.
- Inflation in both New Zealand and the United States remains elevated, driven by higher energy prices. The US August jobs report, which showed a strong labor market, triggered a hawkish repricing in rates markets, leading to expectations of a rate hike by the Federal Reserve. The US government bond yields have been rising, with the 10-year Treasury yield reaching its highest level since 2007, driven by concerns about inflation caused by the oil price surge since the start of the US-Israel war with Iran.
- Meanwhile, the Russian government has been trying to expand the scope of any potential energy truce to include core demands such as the lifting of sanctions and the protection of its energy trade. Kremlin spokesman Dmitry Peskov stated that any easing of fuel markets would not happen without ensuring the safety of Russian fuel tankers and the lifting of sanctions against Moscow's energy exports. This has added to the complexity of the situation, as neither the Russian nor Ukrainian governments have agreed to the energy cease-fire proposed by US President Donald Trump.
- Markets are heavily anticipating a rate hike by the Federal Reserve, with bond markets signaling for weeks that higher interest rates may be needed. While the rise in borrowing costs has been orderly this year, they could remain elevated if geopolitical tensions and high energy prices remain a significant concern. The global benchmark wholesale oil price has risen to over $109 a barrel, up from around $86 at the end of August, further fueling inflation concerns.
- Government bond yields have been rising globally, driven by worries that inflation caused by the oil price surge will lead to higher interest rates. The effective interest rate on US government bonds over 10 years, known as the 10-year Treasury yield, rose as high as 5.04% but has since eased back. The Federal Reserve's decision and guidance on interest rates will be particularly important for the US dollar, as markets increasingly expect higher rates to combat inflation.
What's still developing
- However, the RBNZ is also making clear that the inflation picture is more complicated than the headline number suggests.
- This leaves policymakers trying to prevent the energy shock from spreading into wider prices without putting unnecessary pressure on an economy that is still recovering.
- Peskov, the Kremlin spokesman, said at a news briefing that, while Russia believed a halt to strikes against energy infrastructure would be “a very good idea,” such a deal would not have much effect on fuel markets, as Mr. Trump had claimed.
- “Only then will the world, the global markets, be saturated, and prices will go down,” Mr. Peskov said.
- However, US President Donald Trump opposes a rate hike, having long argued lower rates are great for boosting the economy.
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- He fell out with Warsh's predecessor Jerome Powell over his decision not to cut rates.
- Vanguard senior economist Josh Hirt said on Friday that the Federal Reserve leaving interest rates unchanged at its September meeting could push Treasury yields higher.