From jobless claims to inflation: What will drive Federal Reserve's next rate decision? Explained

In a holiday-shortened week, US market investors are braced for important macroeconomic data, alongside some tail-end earnings. The US benchmark indices closed the previous week on a mixed note, with the Dow Jones and the S&P500 ending on a flat note, while the NASDAQ 100 surged over 0.4%. The US markets were set for a positive close in the previous week; however, stronger-than-expected jobs data boosted hopes for a rate hike at the upcoming policy meeting.

Tuesday

The US markets remained closed on Monday, on the occasion of Labor Day. Meanwhile, the rest of the week is set for key economic releases and earnings. Starting Tuesday, the NFIB small business optimism index and NY 1-year inflation expectation numbers will set the tone for the entire week.

Wednesday

MBA mortgage applications and weekly employment change will drive the sentiment for Wednesday.

Thursday

On Thursday, initial jobless claims data for the week ended September is expected to remain at 205,000, slightly lower than the previously reported 206,000. Lower-than-expected jobless claims data will further add weight to expectations of a rate hike in the coming policy meeting as the labor market shows signs of resilience.

In addition, the data focused on consumer demand is also expected to drive the sentiment for markets on Thursday. PPI demand and existing home sales data for August will signify the strength of the consumer economy. Alongside this, Oracle and Adobe will be announcing their quarterly earnings reports on Thursday

Friday

The key gauge of inflation in the economy, CPI inflation numbers, will be released on Friday. The MoM increase is expected to be +0.4%, vs 0.1% reported previously. Similarly, CPI inflation is expected to remain unchanged at 3.4% for the month of August. Meanwhile, the core CPI, which excludes food and energy prices, is expected to remain at 2.4%, slightly lower than the previous month.

What will drive the Federal Reserve's policy stance?

The stronger-than-expected jobs data last week bolstered the bets on a rate hike in the upcoming policy meeting in September. The US 10Y Treasury yields surged to 4.78%, indicating higher-for-longer interest rates. However, cooled-down inflation numbers and some increase in jobless claims could balance the expectations of a rate hike to 50/50.

(Source: CME Fedwatch tool)

After the previous week’s jobless claims data, the CME Fed watch tool now predicts a 60.4% probability of a rate hike in the September policy meeting, vs 59.4% in the week prior.

(Source: CME Fed watch)

Meanwhile, the Federal Reserve’s dot plot projections also indicate a median interest rate range of 3.75% to 4.0% for 2026, all pointing towards an impending rate hike by the Federal Reserve. In the Jackson Hole Symposium, Kevin Warsh refrained from delivering any projections for the rate trajectory, but sounded concerned about inflation.