For the 3rd consecutive meeting, the US Federal Open Market Committee raised the short-term Fed funds rate by 75 basis points. This latest hike reinforced what has been one of the most aggressive series of rate hikes in modern times. Investors, meanwhile, remained focused on inflation-sensitive economic data in September, looking for signs that hawkish Fed policy was having an effect. While core inflation may have peaked, we have yet to see a meaningful decline in overall prices, with energy perhaps the exception.

Consumer prices edged up +0.1% in August, while core CPI (ex-food & energy) rose a greater than expected +0.6%.  This translates into an +8.3% YoY move in headline inflation and a +6.3% YoY move in core CPI.  Both numbers exceeded analyst estimates.  At the producer level, we saw headline PPI drop -0.1% in August, while core PPI surged higher by +0.4%.  On a trailing  12-month basis, producer prices are up +8.7% YoY while core PPI is higher by +7.3%.  The Fed’s favored measure of inflation, the PCE Deflator, rose +6.2% YoY while the core Deflator is higher by +4.9% versus one year ago.

The one area where higher interest rates are beginning to have an impact is housing, with 30-year mortgage rates now firmly above 6%.  The FHFA House Price Index dropped -0.4% in July, while the S&P CoreLogic CS 20-City HPI fell by -0.44%.  Existing Home Sales fell by -0.4% in August while Pending Home Sale dipped -2.0%, for a YoY decline of -22.5%.  Housing data tends to come with a 1 to 2-month lag and we would anticipate further declines in home prices and sales as move further into the fall season.

The FOMC’s aggressive rate tightening shows little sign of abating any time soon, at least according to FOMC members.  Most support a terminal rate somewhere in the 4% to 4.5% range, with an intention of getting there sooner rather than later.  With the old adage being that “the Fed tends to tighten until something breaks”, that “something” may be upon us shortly as volatility picks up and credit availability dissipates.  More benign inflation readings may sway the Fed to ease up on the pace of hikes, but that data has not been reported yet.

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