The Die is Cast for the Fed

 With the headline consumer price index for August coming in at 3.4% and at 2.4% year-over-year for the core, the die has been cast for the Fed to increase its policy rate by 25 basis points at its meeting next week. As we noted two weeks ago, Fed Chair Kevin Warsh and his Open Market Committee members have all the evidence they need to hike rates. (See: https://shulmaven.blogspot.com/2026/08/warsh-strikes-right-chord.html ) Indeed with oil prices moving higher in September and diesel prices at record highs, it is hard to believe that August's increase in energy prices were a one-off event.

 

The bond market responded appropriately by flattening the yield curve with the yield on 2-year notes advancing by 6 basis points and the yields on the 10-year and 30-year Treasury bonds declining by one basis point and four basis points, respectively as of midday. For the moment, the Fed has gained a modicum of credibility, but time will tell as to whether or not it can be maintained. Shulmaven has long believed that inflation is more endemic than what most market participants believe, and thus the hike next week has to be viewed as the start of a tightening cycle, not one off.