By Danny Jasper, Senior Vice President, Capital Markets

Mortgages and treasuries are flat to slightly lower this morning after the release of consumer price data didn’t do enough to convince traders that the Federal Reserve (Fed) will hold off on a September rate hike.  Consumer prices missed expectations in July, rising only 0.1% at the headline level vs. +0.2% expectations, but the year-over-year gain of 0.2% was in line with estimates.  At the core level, which excludes food and energy, prices were also up 0.1% month-over-month (MoM) and held flat at +1.8% year-over-year (YoY).

Housing was the biggest driver in the core number, as the cost to rent was up 3% YoY, which is an increase over last month’s +2.75% number.  This increase in rental prices accounted for 1.4% of today’s 1.8% total number.  Many are considering this a troubling sign since housing appears to be the only real contributor to inflation at this time (though there were small increases in medical costs and clothing prices).

For now, investors will take whatever gains they can get on inflation, even if they are below the Fed’s medium term target.  On the bright side, real average weekly earnings for July were higher by 2.2% YoY, which again supports a stronger labor market.

St. Louis Fed President Supports September Rate Increase

Moving back to Fed sentiment, we have additional commentary from St. Louis Fed President James Bullard, on raising interest rates this morning.  Bullard took a highly hawkish stance and said the Fed must be prepared to tighten monetary policy more aggressively after the first hike. He added that the Fed needs to “hedge its bets” in determining how fast to raise rates to guard against “asset bubbles” that could pop and tilt the economy back into recession.

Bullard supports the first Fed rate rise next month and is supportive of a “gradual path” in future increases for now, but showed concern for financial stability if the Fed is highly accommodative for too long.

This is now the third Fed official in the last three weeks to openly support a rate increase next month.  With the Fed set to release their minutes from the July FOMC meeting later today at 2 p.m. Eastern, many expect the minutes will provide some actual direction and possibly confirm next month’s rate hike, barring a significant setback in data over the next two weeks.