The Federal Reserve Bank of Cleveland projects that inflation will accelerate in September, driven by the ongoing conflict with Iran and the resulting disruption to global energy supplies. This outlook suggests that the Federal Reserve may continue to raise interest rates, a move that poses a direct challenge to the stock market and the valuation of technology companies.
On Sept. 16, the Federal Open Market Committee raised the federal funds target rate by 25 basis points to a range of 3.75% to 4.00%. This was the fourth time in this century that the Federal Reserve began a rate-hiking cycle. Fed Chair Kevin Warsh and his colleagues acted to address inflation that has remained above the central bank's 2% target for 66 months.
While official September data is not due until Oct. 14, the Cleveland Fed's Inflation Nowcasting tool provides updated estimates following new economic reports. As of Sept. 25, these projections indicate worsening conditions. The U.S. Bureau of Labor Statistics reported that headline inflation for August stood at 3.4%. However, the Cleveland Fed expects the Consumer Price Index to rise to an annualized 3.57% in September.
The outlook is more severe for Personal Consumption Expenditures, a preferred metric for the Federal Reserve that accounts for consumer substitution behavior and third-party payments. The Inflation Nowcasting tool forecasts an annualized PCE rate of 3.78% for August and 3.97% for September, up from a reported 3.7% in July.
The primary driver of this inflation is identified as policies associated with President Donald Trump, specifically the war with Iran. Fighting began seven months ago and has led to the near-persistent closure of the Strait of Hormuz. This blockade has halted the daily flow of approximately 20 million barrels of petroleum liquids, creating the largest energy supply disruption in modern history and causing gas and diesel prices to surge.
The economic impact has expanded beyond fuel prices. Businesses have been forced to change shipping routes, alter transportation modes, and switch suppliers. Additionally, costs for petroleum-based products like plastics have increased. These added expenses are reaching consumers through higher prices across the broader economy.
Core PCE, which excludes volatile food and energy costs, was reported at 3.3% in July, marking 65 consecutive months above the Fed's target. The Cleveland Fed estimates this figure will rise to 3.4% in August and 3.49% in September. In June, Kevin Warsh stated that the Fed had missed its target for five years and intended to fix it.
If inflation remains elevated, the Federal Reserve is likely to adopt a more aggressive stance on interest-rate hikes. Higher financing costs could reduce growth expectations for artificial intelligence infrastructure projects. This shift may force investors to reassess the high valuations currently assigned to AI stocks within the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.