A strong nonfarm payroll provides "rate hike" ammunition—will the CPI push the Federal Reserve to pull the trigger? September rate hike scenario faces a critical test

 As the escalation of recent US-Iran military strikes has sharply heightened geopolitical tensions, the already elevated international oil prices and global shipping costs for oil and gas energy continue to climb, driving market expectations for inflation in both the US and global economies. However, it is precisely against the backdrop of deteriorating geopolitical conditions, rising energy prices, and ongoing major obstacles in global energy transport that the soon-to-be-released US August CPI inflation data could directly determine whether the Federal Reserve will return to a rate-hiking path at the September FOMC monetary policy meeting. Recently released statements from Federal Reserve Chair Powell and Fed Governor Waller both indicate that the burden of proof has shifted—only a very meaningful downside surprise in the CPI could prevent the Fed from resuming rate hikes.

According to Odaily Finance App, the US-Iran conflict is spreading from military facility skirmishes to commercial shipping, causing the energy market to price in renewed supply disruption risks. After the US attacked three Iranian tankers, Iran’s Revolutionary Guard also announced it would target ships escorted by the US military. In the Asian session on September 7, international crude oil prices continued their upward trend, with Brent crude futures once quoting at 97.35 USD per barrel, and WTI crude at 92.28 USD. Previous statistics up to September 4 had shown Brent crude rising nearly 60% year-to-date. The macro implications of this shock are not only that gasoline directly pushes up overall inflation, but also that rising diesel, transportation, and insurance costs continue to squeeze corporate profits and end-consumer prices.

With US-Iran hostilities escalating again, market worries have intensified over prolonged disruptions to energy transport in the Strait of Hormuz and another vital shipping lane—the Bab-el-Mandeb Strait. These two maritime choke points are creating compounding risks. On September 1, Kpler tracked only four bulk commodity carriers passing through the Strait of Hormuz—well below the 10-day average of about 13; on that same day, Bab-el-Mandeb had just 18 such ships, below its 10-day average of around 24. The 10-day average daily volume of bulk carriers through the Strait of Hormuz has dropped to about 10—the lowest since May.

In the longer term, before the conflict, average daily traffic through the Strait of Hormuz was about 130–140 ships, but at the height of the crisis it fell below 10% of normal levels; overall Red Sea and Bab-el-Mandeb shipping volumes fell by more than 50% at one point due to Houthi attacks. Energy shipping fees have also continued to rise, potentially pushing the overall price system further upward.

Take the route from Saudi Arabia’s Yanbu port to ports in southern China as an example: normally, it takes 19 days via the Bab-el-Mandeb Strait; bypassing via the Suez Canal, Mediterranean, Gibraltar, and Cape of Good Hope takes about 48 days—almost a month longer. Fuel costs rise from 1.26 million USD to 2.87 million USD, plus nearly 1 million USD in Suez Canal fees. Benchmark daily earnings for Very Large Crude Carriers (VLCCs) from the Middle East to China climbed as high as $423,736 earlier this year; soon after, time-chartered roundtrip rates on the TD3C route neared $585,000 per day, close to historical highs. War risk surcharges for the Strait of Hormuz also soared from 1–3% of vessel value to 7.5–10%.

Against a backdrop of continued energy inflation and rising shipping costs, the August US nonfarm payrolls report showed an unexpectedly strong gain of 162,000 jobs, with the unemployment rate holding steady at 4.1%, weakening the Fed’s rationale for pausing tightening due to employment concerns; however, average hourly earnings rose 3.1% year-on-year, which does not support equating labor market resilience with runaway wage inflation. Powell’s hawkish signal at Jackson Hole and Waller’s stance that “continuing improvement in inflation allows for patience” make the September 10 PPI and September 11 CPI key tests ahead of the September 15–16 policy meeting, potentially shifting the burden of proof from “why raise rates” to “why hasn’t the Fed raised rates yet.”

A hotter CPI report could force the Fed to hike rates in September! With employment worries reduced, inflation is the “final hurdle” for further rate increases

The latest robust nonfarm payrolls data alleviates concerns over rate hikes; the inflation outcome will determine whether the market further prices in tightening risks. If inflation does not cool enough, the market will need to reassess not just the risk of one rate hike, but also the risk of higher-for-longer rates.

Fed Governor Christopher Waller deliberately or not drew the market’s focus to this week’s August CPI report, to be released September 11, saying the data will have a significant impact on his monetary policy decisions. He stated that if inflation continues to make progress toward the Fed’s 2% target, he would favor maintaining the status quo and is willing to be patient.

Therefore, this week’s report could send a clear message to markets: whether, as of the Fed’s September 16 meeting, the probability of a hike should be priced in as a certainty (i.e., 100%). There is no doubt that a stronger-than-expected August jobs report means the Fed no longer has sufficient justification for pausing based on labor market weakness.

Together with Powell’s August 28 Jackson Hole speech, unless the CPI comes in significantly below expectations, it will be hard for the Fed not to hike in September.

Overall, the burden of proof may have now shifted. The Fed may no longer need data to justify a September rate hike; instead, it may need the CPI report to provide a reason not to hike.

For that reason, this week’s CPI report will be unusually important, as it could provide the final missing piece supporting a September Fed rate hike. The market already expects the report to be quite hot, which means that even a result in line with expectations may be enough to keep a September hike as a very real possibility.

The bond market is already adjusting—Fed communication and expectation management face a test

Wall Street economists universally expect August US headline CPI to rise 0.4% month-on-month, up from 0.1% in July, with the year-on-year gain holding at 3.4%. Meanwhile, core CPI is expected up 0.2% month-on-month, unchanged from July, with the year-on-year rate dropping from 2.5% to 2.4%. Forecast markets such as Kalshi are in close agreement with these expectations.

However, it’s worth noting that there’s a clear risk this week’s data could exceed expectations, as August saw a marked increase in service-sector inflation. The Institute for Supply Management (ISM) services report showed its paid-price index jumping from 70.3 in July to 72.6, well above June’s 67.7. Historically, changes in the ISM services paid-price index often go hand-in-hand with CPI shifts.

Energy prices may add further upward pressure. Higher gasoline prices will directly increase headline CPI, while rising diesel costs may push up transport costs, ultimately feeding into the broader economy.

The 2-year US Treasury yield may already be signaling the direction of monetary policy. The current 2-year yield of around 4.4% shows the market expects considerably tighter policy ahead, while the effective federal funds rate remains well below that level.

Since the 1990s, in almost every cycle, the 2-year Treasury yield has tracked inflation closely, while the effective fed funds rate tends to lag behind the 2-year. Eventually, the funds rate catches up and sometimes exceeds it. Therefore, with 2-year yields near 4.4% today, this historical pattern implies the Fed may hike several more times in the future.

Of course, Waller only has one vote, and Powell has already made it clear the Fed wants to move away from traditional forward guidance. But this raises another question: if officials tell the market explicitly that policy will depend on upcoming data, and the CPI is in line with or above expectations, but the Fed still doesn’t hike, what happens? At that point, the issue is no longer just the September decision—but rather how the market should interpret the Fed’s communication overall.

Strong nonfarm payrolls provide “ammunition” for hikes: Will CPI pull the trigger on a September rate move? Bank of America bets on a hike, Citigroup on a hold

Strong payrolls mean the Fed is better positioned to hike, not that it must do so. August employment rose 162,000, and the previous two months were revised up by a combined 55,000, lowering fears of a sudden employment collapse; but average hourly earnings rose 0.3% month-on-month and 3.1% year-on-year, not yet showing runaway wage pressure. Futures traders now price the odds of a September Fed hike at about 60%, suggesting payrolls data only added to the hawkish case, and does not override the inflation picture.

Top Wall Street institutions including BlackRock, BMO, and Citigroup agree—the labor market obstacle has been reduced, but policy suspense still depends on whether ongoing improvement in both CPI and PCE inflation is sufficient, not just a single payrolls report.

Bank of America strategists project core CPI will rise 0.22% month-on-month, translating to about 0.24% m-o-m (or 3.4% y-o-y) for core PCE, which they see as supporting a September hike. Citigroup forecasts core CPI will rise 0.184% m-o-m and fall to 2.3% y-o-y, leaning toward no change in rates. The difference in their core CPI forecasts is just 0.036 percentage points; rounded to one decimal, both appear as 0.2%. Thus, the real Wall Street debate about a September Fed rate hike centers on individual price components, the correspondence to PCE statistics, and policymakers’ definitions of “sufficient progress on inflation.”

Some economists still regard PCE inflation as the key anchor, with CPI important but incomplete as evidence. Housing data has a high weight in CPI and cooling there can notably depress core CPI; PCE covers more healthcare spending by employers and government, so it may show a different trend. Waller also points out that some non-market service prices are estimated, potentially exaggerating their contribution to his assessment of underlying inflation pressures.

Citigroup strategists believe strong jobs numbers raise the bar for the inflation evidence needed to justify patience; CPI remains a key input for policy judgment, but isn’t a direct trigger for hiking rates. If core services and subsequent PCE data stay hot, the Fed could be nudged toward a hike. Bank of America says mild inflation supports a rate pause, Treasuries rebound and a weaker dollar; if inflation heats up again, the Fed may hike in September, pushing yields and the dollar higher once more.