Core Inflation Ran Hot Again and the Fed Meets Wednesday. The Hike Is Not the Risk.

August core consumer prices rose 0.3% on the month, hotter than economists expected, and the reading landed at the end of a holiday-shortened week in which the Dow fell more than 1.5%, the steepest drop of the three major indexes. Fresh escalation in the Iran conflict pushed oil higher at the same time, and the ten-year Treasury yield has been climbing with it. The Federal Open Market Committee concludes its two-day meeting on Wednesday with a rate decision at 2pm Eastern, and markets now overwhelmingly expect an increase.

The mechanism behind the move is energy feeding into everything else. Higher crude prices raise transport and production costs, which appear in goods prices with a lag, while wholesale prices have already been running well above target. That combination makes it harder for policymakers to argue that the recent firmness in inflation is temporary, and it has pushed the Fed chair’s hawkish tone at Jackson Hole from rhetoric towards commitment. The European Central Bank has already moved, raising its rate a quarter point to 2.50% to address energy-driven inflation of its own.

Because a hike is so widely expected, it is not really the risk. A quarter point that everybody has priced in should pass with little drama; what moves markets is the press conference that follows. The chair’s last extended remarks rattled equities, and another firm message about how long rates stay elevated would do more damage than the decision itself. There is a case on the other side too: if the committee raises rates while signalling that this is likely the end of the cycle, the reaction could be positive despite the tightening.

For anyone holding a diversified portfolio, the useful response is not to trade the announcement. Watch instead whether the ten-year yield holds near its recent highs in the days after the meeting, because that is what actually reprices mortgages, annuity rates and the discount applied to future company earnings. A rate decision lasts an afternoon. The level of long-term yields is what shows up in retirement planning.