Economy
Why Fed is still likely to stay on hold despite rising hike bets
The bar for a U.S. Federal Reserve (Fed) interest rate hike this week is likely higher than rate futures markets suggest, owing not only to softer-than-expected inflation data and a fresh easing of hostilities between the U.S. and Iran, but also to concerns that markets would interpret a single hike as a sign that more increases are ahead.
Going into the July 28-29 policy meeting, just the second one led by Fed Chair Kevin Warsh, the U.S. central bank had left its benchmark policy rate unchanged in the 3.50%-3.75% range since December.
The probability for a hike this week, as reflected in rate futures prices, had been growing on the renewed rise in energy prices and the hawkish intonations of a number of Warsh’s colleagues.
If history is any guide, though, when the Fed hikes or cuts rates after an extended hold, it keeps going in the same direction for at least a few meetings, and policymakers may not be quite ready to send that signal.
“They don’t usually do a one-and-done, so it really means … the (policy) committee has to decide whether they’re going to commit to a sequence of rate increases,” said James Bullard, who led the St. Louis Fed from 2008 until 2023 before becoming the dean of the Mitch Daniels School of Business at Purdue University. “I don’t think they’re ready to do that at this meeting.”
Hawks versus doves
At the Fed’s June 16-17 meeting, Warsh’s first as head of the central bank, all 18 of his colleagues supported the decision to leave the target for short-term borrowing costs unchanged, despite a few who, even then, saw the case for a rate hike.
In the weeks since, the hawkish case has lost a little steam. Consumer prices rose 3.5% in June from a year earlier, the Bureau of Labor Statistics reported earlier this month, still high but down from 4.2% in May as a U.S.-Iran cease-fire lowered fuel prices.
Trend inflation, estimated by stripping out volatile energy and food prices, also eased, with the core Consumer Price Index measure dropping to 2.6% from 2.9%. The influential head of the New York Fed expressed some conviction earlier this month that the trend would continue.
The labor market, meanwhile, has remained on solid ground. Job growth slowed sharply in June, but the gain of 57,000 in nonfarm payrolls was above what economists estimate is the so-called break-even rate where there are enough jobs generated to keep up with workforce growth. The unemployment rate ticked down to 4.2%. Hourly wage growth was 3.5% on a year-over-year basis, suggesting the labor market was not contributing to inflation.
Warsh, though quiet on his own rate-path views, has said he believes productivity growth may allow for faster economic expansion without stronger price pressures.
Still, the underlying reasons prompting half of the Fed policymakers at the June meeting to pencil in a higher policy rate by the end of this year remain intact. Inflation has been running above the Fed’s 2% goal for more than five years, and it reaccelerated in the first half of this year. Oil prices shot upward again this month as the cease-fire in the Middle East war fell apart, rekindling inflation concerns that some economists and Fed policymakers worry are already broadening beyond fuel and grocery prices, particularly as investment in artificial intelligence supercharges demand in some sectors of the economy.
The Fed will announce its policy decision at 2 p.m. EDT (6 p.m. GMT) on Wednesday following the end of a two-day meeting. Most economists say they expect at least one and as many as three dissents from policymakers favoring a rate hike, laying the groundwork for the start of a sequence of rises in borrowing costs in September unless inflation takes a decided turn for the better before then.
“September remains our base case for the first hike,” analysts at Capital Economics wrote last week. “By then, the Fed should have greater evidence that strong goods price pressures are not fading, despite the easing of tariff effects. Moreover, a September hike is now fully priced into markets, which Warsh has stressed will be an important steer for policy decisions under his chairmanship.”
Some analysts, however, see a case to get going now, especially if the new Fed chief is as serious about containing inflation as he has stated. “We doubt Warsh would face widespread opposition if he argued for tightening. The final decision could go either way, but we think the Fed is more likely to raise rates by 25 basis points on Wednesday than to stand pat,” analysts at Wrightson ICAP said.
Once Fed hikes, it usually keeps going
An isolated Fed rate hike is rare. The last time the central bank raised rates without delivering another one soon after was in 2015, but it wasn’t for lack of trying, with policymakers led by then-Fed chief Janet Yellen repeatedly promising “normalization” after years of a near-zero policy rate. It took a year for policymakers to feel the economy was strong enough to handle more rises in borrowing costs, but eventually they got there.
The one clear exception was in March 1997, the only interest rate adjustment of the modern era that was sandwiched by moves in the opposite direction. Transcripts from that meeting show that while then-Fed Chairman Alan Greenspan felt “the odds are better than 50/50” that the central bank would raise rates again, he preferred markets not make that presumption, and took the unusual step of issuing a statement to announce the move.
The minutes of each subsequent meeting that year did note a “firming” bias, but in the end inflation never accelerated enough to force the Fed to follow through. Ultimately, the shock of Russia’s debt default and the near-failure of a prominent U.S. hedge fund triggered a series of rate cuts starting in September 1998.
At this week’s meeting, markets are pricing about a one-in-three chance of a hike. Economists say it’s worth looking beyond a single meeting for a read on what’s actually at stake.
“The real discussion is whether the Fed will start a proper hiking cycle, which is typically delivered through at least three hikes, or not hiking at all,” analysts at Bank of America wrote.
Inflation rose far quicker than expected in some of the eurozone’s biggest economies in September, as energy costs soared because of the Middle East war, official data showed Wednesday, boosting expectations for further interest rate hikes.
The annual rate hit 3.3% in Germany, Europe’s biggest economy, the fastest pace since December 2023, according to preliminary data from the statistics agency Destatis.
In France, consumer prices rose 3% in the month compared to a year earlier, the highest since February 2024 and a sharp increase from 2.4% in August, the statistics office Insee said.
In Italy, inflation jumped to 4.2%, nearly a full percentage point above the 3.3% recorded in August, the Istat agency reported.
In Spain, the inflation rate rose to 5% in September from 4.6% in August, data showed on Tuesday.
Energy inflation appears to have surprised on the upside in all countries that have reported so far, as has food inflation, although much more modestly, Mariana Monteiro from JPMorgan said.
The price hikes are well above the European Central Bank’s (ECB) inflation target of 2%, raising the likelihood it will raise interest rates further.
The ECB had expected inflation to accelerate from 3.3% in the third quarter to 3.6% in the final three months of the year, but economists say the actual peak is likely to be closer to 4%, given sky-high energy costs.
Diesel prices in particular have hit record highs in Germany, France, Italy and several other eurozone countries in recent weeks, a result of the Middle East war that has slowed shipments of both crude oil and refined fuels from the Gulf.
“With very few signs of a resolution of tensions in the Middle East on the horizon and winter approaching, a correction in energy prices is unlikely any time soon,” Rory Fennessy, senior European economist at Oxford Economics, said.
That has raised expectations among analysts that the ECB will tighten monetary policy further in the coming months to rein in inflation, potentially dampening the eurozone’s economic growth.
The central bank raised its benchmark rate to 2.5% earlier this month.
Inflation data for the full eurozone will be released Friday.
Because this year’s inflation surge has yet to generate dangerous second-round effects across the eurozone, a moderate policy response from the European Central Bank remains appropriate, ECB chief Christine Lagarde said Monday.
Inflation ‘feeding through’
Jack Allen-Reynolds, an economist at Capital Economics, said the inflation readings “suggest that the indirect effects of higher energy costs are beginning to feed through” to the wider economy.
But he added that “this is unlikely to tip the balance for the ECB” and he expects policymakers to keep rates steady at their next meeting in October, before hiking again in December.
His view was shared by other analysts who said the central bank would wait until December, when it also releases updated economic forecasts.
Some analysts also noted that core inflation in Germany, which excludes volatile food and energy costs, was steady at 2.4% in September.
“This should ease the immediate pressure on the ECB to implement further monetary tightening at its next meeting,” said Dirk Schumacher, chief economist at the German public lender KfW.
Still, Rory Fennessy of Oxford Economics said the latest inflation readings could shift the debate at the ECB.
“The fact that inflation has surprised to the upside in September will only strengthen the case among the hawks in the [ECB governing council] for a more aggressive pace of tightening,” he said.
Analysts at ING meanwhile said the French figures “suggest that inflation is likely to remain above 3% for the rest of 2026 before gradually declining in 2027.”
That will weigh on household purchasing power “at a time when consumption is weakening and rising interest rates are exacerbating France’s fiscal difficulties,” they said.
Consumer spending fell 0.5% in France in August, Insee also reported Wednesday, and the country’s public debt stood at 119% of GDP in the second quarter, nearly double the eurozone limit of 60%.
Inflation in the United States increased less than expected in August, even as consumers stepped up spending, according to data Wednesday that could prompt markets to further reduce the odds of another interest rate increase from the Federal Reserve (Fed) next month.
Consumer prices rose 3.4% last month compared with a year earlier, the Commerce Department said, below economists’ expectations of 3.7%. On a monthly basis, inflation climbed 0.3%, up from 0.1% in July, a sign that prices are still running hot.
Excluding the volatile energy and food categories, inflation also came in lower than expected, rising 3% in August from a year ago. And from July to August, core prices rose just 0.2%, up from 0.1% the previous month. Many economists feared core prices would rise more quickly month-to-month.
U.S. markets bounced higher immediately on the new inflation reading, with investors betting that an expected interest rate hike from the Fed might be delayed.
Even so, inflation remains above the Federal Reserve’s 2% target and the monthly increase in August suggests it isn’t moving back toward the target anytime soon.
The Fed lifted its key short-term interest rate two weeks ago for the first time in three years to combat inflation, and most economists expect it will do so at least once more this year, possibly as soon as late next month.
“Inflation’s trend is lower but still not close to their target and not improving, either,” Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said in an email.
Wednesday’s report covered a key inflation gauge closely watched by the Fed, known as the personal consumption expenditures price index. It is similar to the higher-profile consumer price index, which was released earlier this month.
High prices have cast a pall on the U.S. economy, even as growth is mostly solid and the unemployment rate is low. On Tuesday, the Conference Board’s consumer confidence survey fell to its lowest level since 2014, a period that includes both the Great Recession and a global pandemic.
Americans’ paychecks are growing but not as quickly as prices.
Inflation for July was previously reported at 3.7% but was revised lower to 3.4% by the government as part of an update in how it measures price changes in several categories, including investment management, computer software and accessories, and legal services.
For example, the government previously put a heavy weight on some computer accessories that have jumped in price because of outsized demand from the AI buildout. The revisions lowered that weight and as a result, the higher prices for some computer equipment are not driving up this measure of inflation as much.
Despite elevated prices, Americans accelerated their spending last month, the government said, with spending jumping 0.9% from July to August, up from just 0.1% the previous month.
Some of that increase was likely fueled by wealthier Americans cashing in their gains from higher stock prices, a recent report from JPMorgan suggests. Other consumers may be taking on more debt to support their spending.
After-tax incomes, adjusted for inflation, were unchanged on a monthly basis in August, after rising 0.3% in July, the report said.
Healthy consumer spending could fuel a pickup in growth. In a separate report Wednesday, the government said the economy expanded at a 2.2% annual pace in the July-September quarter. Analysts expect that to pick up to a 3% rate in the current quarter.
State authorities launched an audit of recent capital markets transactions and issued new detention warrants Wednesday, after Ankara created a coordination board to oversee the rapid liquidation of investment funds caught up in the recent turmoil.
President Recep Tayyip Erdoğan announced Tuesday that Vice President Cevdet Yılmaz will chair the board, following a three-hour meeting with economic officials and market regulators. He also tasked the State Supervisory Council (DDK) with examining the crisis.
DDK Chair Salih Tanrıkulu said late Tuesday the council had begun an investigation to determine whether fund transactions and supervisory activities in capital markets were conducted in line with regulations.
How fund turmoil unfolded
The problems emerged in early September, when the Capital Markets Board (SPK) changed its guidelines for investment funds. Funds could no longer put all their assets into a single stock and were required to diversify.
The move sought to address concerns that many funds were heavily invested in a small number of obscure or hard-to-sell stocks.
To comply, some funds began selling holdings, which spooked investors and set off a rush to cash out. Several fund management companies then admitted they could not meet redemption demands. On Sept. 16, authorities ordered 131 funds managed by seven companies into liquidation.
The crisis worsened amid suspected price manipulation in a number of thinly traded stocks, which triggered heavy losses and redemption pressures.
Almost half a million investors hold stakes in the funds ordered to be liquidated, whose combined assets are said to be around TL 1 trillion ($20.4 billion).
Criminal investigation widens
Authorities have also investigated some of the asset managers and arrested or detained several financial executives.
Justice Minister Akın Gürlek said Wednesday detention orders were issued for 34 more suspects as part of the probe.
The latest operation brings the total number of suspects in the case to 217, Gürlek said on social media. Of those, 56 have been arrested and 88 placed under judicial control.
The investigation is not limited to the funds and suspects already identified, he added.
Gürlek said authorities were also examining trading activity in 26 stocks listed on Borsa Istanbul deemed to have been subject to manipulative transactions, money transfers and connections to individuals and accounts that generated unusually large gains.
He said authorities will pursue legal procedures to transfer assets identified as proceeds of crime to a fund to be established under the Savings Deposit Insurance Fund (TMSF).
Separately, former SPK Chair Ibrahim Ömer Gönül, who was appointed in 2022 and left the post in April when his term ended, was expected to give a statement to prosecutors Wednesday.
Key numbers
The funds held around TL 1.3 trillion in assets on Aug. 31. By Sept. 16, a day before the SPK announced the liquidation decision, assets had fallen by TL 272.5 billion, or 21%, to TL 992 billion, reflecting investor redemptions and share price declines. The SPK said last week that 455,758 individual investors held investments in the affected funds. Fifteen money market funds held TL 307 billion, or 31% of assets due to be liquidated. The other 116 funds, including equity funds, held TL 685 billion, or 69%. The five largest funds held TL 686.7 billion, or 69.2% of the total.
Two-pronged response
At Tuesday’s meeting, the SPK presented a road map for paying investors, based on the asset and liquidity status of the funds under liquidation.
The Communications Directorate said officials also discussed additional administrative and legal measures to strengthen capital markets oversight and prevent similar cases.
The two bodies tasked by Erdoğan will have separate roles. The Fund Coordination Board will manage the liquidation, aiming to finish it quickly while protecting investors’ legitimate rights and the public interest. It will assess the funds’ assets and liquidity, determine how much each investor is owed and coordinate repayments.
The DDK, working independently of the liquidation, will look backward. It will form a team of auditors, joined by capital markets specialists, to review transactions and decisions at the funds and establish how the crisis emerged, who was responsible and whether any institutions failed in their duties.
Under its constitutional powers, it can directly request confidential and public records, physical and digital, from relevant institutions, including the SPK and Borsa Istanbul (BIST).
Auditors will examine financial records to identify suspicious transactions, the roles of those involved in supervision and any actions that may have violated regulations or harmed market functioning, from both administrative and legal perspectives.
Once the investigation is complete, the DDK will submit its reports to Erdoğan. It may also forward its findings to the relevant administrative and judicial authorities.
The European Union is reportedly preparing to offer candidate countries gradual access to its single market and research programs before full membership, according to a report on Wednesday citing a draft proposal prepared by the European Commission.
The proposal envisages the “gradual integration” of candidate countries into the EU’s single market, including closer trade links and participation in research, innovation and industrial programs, as they work toward full membership, Politico reported on Wednesday.
“The single market is the first priority for economic convergence,” the draft review says, adding that earlier integration could strengthen European value chains and reduce strategic dependencies.
The document proposes deeper participation for candidate countries to demonstrate regulatory alignment and sufficient enforcement capacity, particularly in areas that support preparations for EU accession and serve shared economic and strategic interests.
Under the proposed framework, countries would also be expected to align more closely with EU foreign and security policies.
Access could be limited or withdrawn if countries fail to meet the required conditions, including democratic reforms and alignment with the bloc’s strategic interests.
The European Commission is also considering a wider use of qualified majority voting in areas currently subject to unanimity.
The draft says the risk of delays or blockages could increase as EU membership expands.
It also refers to so-called “passerelle clauses,” which can allow certain decisions to shift from unanimity to majority voting without formally amending the EU treaties.
Such mechanisms could potentially be used in areas including sanctions, responses to human rights crises and the deployment of civilian missions.
However, activating the clauses themselves requires unanimous approval from EU member states.
EU leaders are due to discuss enlargement and the bloc’s future institutional arrangements at a summit in Brussels on Oct. 15-16.
Türkiye’s unemployment rate decreased to 7.8% in August from 8.1% in the previous month, official data showed on Wednesday.
The number of unemployed people aged 15 and over in Türkiye decreased by 106,000 to 2.74 million in August compared to the previous month, according to the Turkish Statistical Institute (TurkStat).
The unemployment rate was estimated at 6.6% for men and 10.1% for women during the same period, TurkStat said.
The number of employed persons in Türkiye increased by 136,000 to reach 32.51 million in August, as the employment rate rose by 0.1 percentage points to 48.4%.
The employment rate was 65.8% for men and 31.5% for women in the month.
The labor force participation rate remained unchanged at 52.5% in August, while the labor force increased by 29,000 people to 35.25 million.
The participation rate reached 70.5% for men and 35% for women during the month.
The youth unemployment rate for the 15-24 age group dropped by 1.1 percentage points to 13% in August.
The youth unemployment rate stood at 9.7% for men and 19.4% for women.
The average weekly actual working hours of people at work increased by 0.5 hours to 42.5 hours in August compared to the previous month.
The U.K. economy expanded slightly more than previuosly reported in the second quarter of the year, revised data showed on Wednesday.
The data showed positive signs from household finances and business investment that could encourage Treasury chief John Healey as he prepares October’s budget.
Economic output expanded by 0.5% in the April-to-June period, the Office for National Statistics (ONS) said.
The reading was slightly stronger than a preliminary estimate for 0.4% growth in gross domestic product (GDP). Economists polled by Reuters had expected the 0.4% rise to be confirmed.
Britain’s economy was the fastest growing among the G-7 large advanced economies in the first half of 2026, the ONS data showed.
Real household disposable income per head rose by 1.0% in quarterly terms during the three months to June, the biggest jump since the end of 2024 and following a 0.8% drop in the first quarter.
The ONS also revised up second-quarter business investment growth to an annual rate of 5.2% from an initial estimate of 0.8%.
Separate balance-of-payments data showed Britain ran a smaller current account deficit than economists had expected in the second quarter, at 19.9 billion pounds ($26.4 billion) versus a consensus of 24.7 billion pounds.
Excluding precious metals trade, the deficit closed to 1.4% of economic output, the smallest such reading in five years, and helped by strong growth in services exports.
-
Politics3 days agoTürkiye, UAE set for new talks amid Iran war, Israeli expansion
-
Economy2 days agoTrump Inc. faces congressional grilling if Democrats win midterms
-
Economy2 days agoTurkish Air Force gets new homegrown next-gen trainer aircraft
-
Politics2 days agoTurkish prosecutors launch probe over lawmaker accused of bribe
-
Economy2 days agoTurkish air force gets 1st homegrown next-gen trainer aircraft
-
Politics2 days agoRussia eyes conditional consent to Türkiye’s S-400 transfer
-
Politics2 days agoGreek media lays out first 24 hours of hypothetical clash with Türkiye
-
Sports2 days agoCape Verde football hero Vozinha rues life after World Cup fame