U.S. Inflation Data Could Decide Timing of Federal Reserve Rate Hike — Interview

By Emese Bartha

U.S. consumer-price inflation data for August on Friday will likely be the final bit of information that could tilt the Federal Reserve toward either raising interest rates or keeping them on hold at its Sept. 16 policy decision, said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management.

A significantly stronger-than-expected U.S. employment report last Friday--showing the addition of 162,000 jobs in August, roughly triple the 53,000 expected by analysts polled by The Wall Street Journal--pushed market bets for a 25-basis-point hike as high as 61%, compared with approximately 50% beforehand. Markets currently price in a 59% probability, according to LSEG.

"The September decision is essentially a coin flip and will likely be determined by the upcoming inflation data," Bianco said. "The stronger-than-expected August payrolls report strengthened the case for a hike, but it did not make one a foregone conclusion."

Recent comments from Fed policymakers have pointed to the importance of inflation data for the central bank's upcoming decisions, particularly in light of the recent sharp rise in oil prices due to renewed Middle East tensions.

Federal Reserve Chairman Kevin Warsh has stressed the importance of ensuring that inflation is returned to the 2% target and indicated that the central bank would act by raising interest rates if necessary. Last week, Fed Governor Christopher Waller said he would support holding interest rates steady if the August inflation data backed it up.

Analysts polled by The Wall Street Journal forecast the data will show headline annual CPI inflation at 3.4% in August, matching July's figure. They expect a modest deceleration in annual core CPI inflation to 2.4% from 2.5% previously.

"A hot inflation print would make a September hike far more likely, while softer data could justify keeping rates unchanged," Bianco said.

Ahead of Friday's data, producer-price inflation figures--a measure of pipeline inflationary pressure--will also be important, she said.

If the Fed doesn't get a clear signal from this week's inflation figures and decides to leave rates on hold in September, the most likely alternatives for a rate increase are October or December, Bianco said.

"Ultimately, the debate is increasingly about timing rather than direction, with markets still pricing in a high probability of at least one additional hike before year-end."

The recent sharp rise in Treasury yields, which lifted the 10-year yield to its highest in almost three years, wasn't due to a panic move by investors but rather "a sustained repricing toward a higher-yield environment" which is global in nature, Bianco said.

"Long-dated government bond yields are near multi-year highs across the U.S., Europe, Japan, and the U.K., suggesting the story extends beyond U.S.-specific concerns," Bianco said.

Concerns about fiscal policy, high levels of government-bond issuance, competition from corporate issuance--in particular from large tech companies--, and uncertainty over the inflation and interest-rate outlooks are major factors behind the recent surge in yields, she said, adding that thin, end-of-summer liquidity amplified these moves.

"Large deficits and elevated Treasury issuance are forcing investors to demand higher compensation for holding long-duration debt," she said. "Investors remain focused on whether inflation can return sustainably to target and how willing the Fed is to tighten further if necessary."

Bianco expects the U.S. Treasury market to remain volatile, particularly if inflation stays firm or fiscal concerns intensify.

Investors' views on whether or not yields have risen too far genuinely diverge, she said.

"Some investors see yields above 5% on the long end as attractive entry points for long-term income buyers. Others argue that current term premiums still do not fully compensate for rising debt levels and future issuance risk," she said. Term premium is the additional compensation investors demand for holding long-dated debt.

"This is one of the more actively debated questions in fixed income today."

BondBloxx broadly expects a 'higher-for-longer' rate environment and a steeper yield curve, where the gap between short-dated and long-dated yields widens.

A more positive outlook on longer-dated bonds, which would push yields lower, would require one or more of the following: meaningful fiscal improvement; slower issuance growth; a Treasury funding tilt toward short-term bills; or softer economic data that allow interest rates to move lower without reigniting inflation, Bianco said.

For now, BondBloxx favors short- to intermediate-dated U.S. Treasurys over long-dated peers.

Still, Bianco said there is currently little evidence to suggest a need for further intervention by the U.S. Treasury to support long-dated bonds.

The Treasury recently announced that it would double buybacks of long-dated debt to at least $4 billion per operation, from $2 billion previously. However, Bianco noted that the Treasury retains the flexibility to adjust the program if market conditions warranted and it could opt to do so.

The current level of at least $4 billion per buyback operation "should not be viewed as a ceiling," she said.

Write to Emese Bartha at emese.bartha@wsj.com

(END) Dow Jones Newswires

September 08, 2026 11:30 ET (15:30 GMT)