An inflation report Wednesday should be a big deal for the Fed. Here's what to expect

• At its July meeting, the Fed held rates at 3.5%-3.75% with three dissenting votes favoring a hike; traders now see only 50-50 odds of a September increase
• Bank of America expects three rate hikes if core inflation averages 0.25% monthly over the next two months, calling a September hike 'all but guaranteed' under that scenario
• Cleveland Fed President Beth Hammack, a July dissenter, stated that 'one 25-basis-point move probably doesn't do a whole lot' and expects multiple increases will likely be needed

Summary: Fed Awaits Key CPI Inflation Data

Key Data Expected (Wednesday, 8:30 AM ET):

• Headline CPI: +0.1% monthly, 3.4% annually (down 0.1pp from June)
• Core CPI: +0.2% monthly, 2.5% annually (down 0.1pp from June)
• Both metrics remain above the Fed's 2% target

Market Implications:

The Consumer Price Index release could provide critical guidance on the Federal Reserve's interest rate trajectory. Two consecutive modest monthly readings may allow the Fed to maintain its current 3.5%-3.75% rate range through year-end.

Fed Policy Outlook:

At July's meeting, the Fed held rates steady, though three members dissented in favor of a 0.25% hike. Market pricing now shows September rate hikes as a 50-50 proposition, with October or December more likely. Fed officials will review both July and August inflation data before the next meeting, as August's gathering is skipped for the Jackson Hole symposium.

Divergent Views:

• RSM's Joe Brusuelas expects the Fed will remain on hold if CPI meets forecasts
• Bank of America still projects three rate increases ahead, noting the Fed's reaction function is "heavily skewed towards inflation data"
• Cleveland Fed President Beth Hammack (a July dissenter) suggests multiple hikes may be needed, stating "one 25-basis-point move probably doesn't do a whole lot"

Economic Context:

Recent data shows mixed signals: June CPI declined 0.4% monthly with flat core readings, while July's jobs report revealed slower job growth (40,000) despite unemployment falling to 4.1%.

BofA suggests if monthly core CPI averages 0.25%+ over two months, September hikes are "all but guaranteed."