Fed Rate Hike Would Be to Appease Wall Street, Critics Say

The odds of another Federal Reserve interest-rate increase have risen sharply, drawing criticism that any move this month would be aimed more at appeasing financial markets than responding to inflation.

Goldman Sachs revised its forecast and now expects the Fed to raise its benchmark interest rate by 25 basis points at the September Federal Open Market Committee meeting, CoinDesk reported on September 14. The change means even Goldman, which had maintained a hold call while other major investment banks leaned toward a hike, has now shifted to forecasting an increase.

Goldman said the latest Consumer Price Index data prompted it to lift its forecast for the August core Personal Consumption Expenditures price index to a 0.26% month-on-month increase, while its underlying inflation outlook remained unchanged. Even so, the bank said the FOMC would want to avoid the market reaction that could follow a decision to hold rates steady when markets are pricing in roughly a 90% chance of a hike.

Markets are also leaning toward a September increase. The CME FedWatch Tool showed on September 14 that the probability of the Fed raising rates on September 16 stood at 86.2%.

Some critics argue the Fed is taking too much of its cue from markets. James Thorne, chief market strategist at Wellington-Altus, said Goldman’s shift in outlook effectively meant the Fed would be raising rates to calm Wall Street even though the inflation outlook had not materially changed.

A rate increase would not boost oil production, expand refining capacity or repair damaged supply chains, he said. Instead, it would weaken demand, investment, employment and household purchasing power.

Wage growth has also slowed to 3.1% from a year earlier. Thorne added that there is still no evidence of a wage-price spiral or that an energy-price shock is spreading into broader inflation.