Analyst Mike Cahill said the strength of the upcoming Consumer Price Index reading could shape whether the Federal Reserve acts next week. In his view, a stronger CPI print, if broad enough, could push the Fed to respond because it would mark a departure from the policy framework that Williams and Waller laid out this summer. A softer reading, by contrast, should be enough for the central bank to leave rates unchanged without triggering an adverse market reaction. Cahill said the harder case would be a middling outcome, as markets have already shown discomfort with a situation in which inflation is around 2.5% and the Fed still does not move. He also said the weaker U.S. dollar reflects several factors, including the Fed’s leaning toward holding rates steady and a policy preference already shown by the Treasury Department to let the foreign-exchange market absorb the adjustment rather than putting that pressure on fixed-income markets.
Analyst Mike Cahill said next week’s Federal Reserve decision may depend on the strength of the upcoming Consumer Price Index, or CPI, data.
According to Cahill, if the CPI reading comes in stronger and that strength is broad-based enough, the Fed could take action. He said such an outcome would depart from the policy framework that Williams and Waller put forward this summer.
If the data is softer, he said, it should be enough for the Fed to keep interest rates unchanged, while also avoiding a negative market reaction.
A middle-ground outcome would be more difficult. Cahill said markets are already clearly uneasy with inflation running at about 2.5% while the Fed remains on hold.
More broadly, Cahill said the weaker dollar reflects several factors, including the Fed’s preference to leave rates unchanged and a policy bias already shown by the Treasury Department to let the foreign-exchange market adjust rather than forcing fixed-income markets to absorb the pressure.
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