4
The Federal Reserve’s September meeting comes as market expectations for a 25-basis-point rate hike have risen following firmer inflation data, stronger employment figures and hawkish commentary from Fed Chair Kevin Warsh. While the rate decision is increasingly priced in, the experts say the Fed’s guidance on the policy path ahead will be key, with markets closely watching the updated dot plot, Treasury yields and signals on whether further tightening could follow.
Madhur Kakkar, Founder and CEO, Elevate Financial Services
“The Federal Reserve is widely expected to raise rates by 25 basis points at the September meeting, but the key message will be whether this marks a tightening phase or a response to recent inflation data. My view is that the Fed will not react to a single inflation print alone. However, with inflation pressures remaining firm and the labor market showing resilience, policymakers may find it difficult to maintain a wait-and-watch approach without risking higher inflation expectations. Recent CPI data lifted market-implied odds of a September hike to around 87%–90%. The bigger challenge for the Fed is that it may need to keep policy restrictive even as growth momentum moderates, making the inflation growth trade off more difficult in the months ahead.”
Vijay Valecha, Chief Investment Officer, Century Financial
September FOMC: The Hike Looks Likely, but the Policy Path Remains Unclear
This week’s FOMC meeting looks close to a settled decision, yet the message it sends matters more than the move itself. Fed funds futures point strongly to a quarter-point hike, and the Committee looks ready to act. But the economic case is finely balanced. Also, Chairman Kevin Warsh’s reaction function remains only partly explained. In a no-guidance regime, the real content also lies in the updated dot plot and the pattern of dissent, beyond the headline decision. Currently, the benchmark federal funds rate sits in the 3.50% to 3.75% range.
Fed funds futures now price in roughly a 90% chance of a quarter-point hike to 3.75%–4.00%, up sharply from a few weeks ago. Renewed conflict involving Iran has pushed crude higher and lifted US diesel above $6 a gallon for the first time. At the same time, wholesale and core consumer prices ran hotter than expected in August, supporting a move. On the other side, the breadth of inflation appears to have narrowed; a scheduled core PCE revision at the end of the month is likely to lower historical inflation readings. Also, much of the August core CPI surprise came from a single item, wireless phone services. Beyond the economic case, the pull for the FOMC to move comes largely from prior guidance and market pricing.
Warsh’s Jackson Hole speech in August set the tone for a hike, and Governor Christopher Waller was more explicit, tying his support to the August inflation reading. With markets close to fully priced, a hold would raise doubts about Fed credibility and push long-term yields, which are already at their highest level in more than twenty years, higher still. President Trump has publicly pressed for a cut, but the greater risk for the Fed is unsettling global markets rather than displeasing the White House. Markets are also focused on the future policy path beyond the September meeting: how many officials now project a follow-up hike.
Views on the path from here are split. One camp expects a one-and-done, arguing that the growth and jobs cost of further tightening outweighs a small inflation benefit and that the coming PCE revision will make inflation look tamer. Another expects two more moves, a pause into the November midterms and a further hike in December. With Warsh again unlikely to submit a projection and the statement likely to stay short, the dot plot and long-end yields will do most of the guiding for markets.
Hamza Dweik, Head of Trading (MENA), Saxo Bank
“As of 14 September, the Federal Reserve’s 15-16 September meeting is shaping up to be one of the most finely balanced policy decisions of the year. Markets are currently pricing a modest bias towards a 25bp rate hike, with various market-based measures suggesting roughly a 55-60% probability of an increase from the current 3.50%-3.75% target range. Web-based market pricing trackers show expectations have shifted significantly over recent weeks following firmer inflation data, stronger employment figures, and hawkish commentary from Fed Chair Kevin Warsh.
Our base case is that the Fed delivers a 25bp hike, raising the fed funds target range to 3.75%-4.00%. The key argument for further tightening is that inflation remains above the Fed’s 2% objective, while recent economic data continues to point to a resilient US economy. Market expectations for a hike have risen notably since Jackson Hole, where Chair Warsh reiterated that the Fed needs greater confidence that inflation is moving sustainably back towards target.
That said, this is far from a unanimous call. The July FOMC meeting ended with an unusual 9-3 vote to hold rates steady, with three policymakers dissenting in favor of an immediate rate increase. The division within the committee highlights the uncertainty surrounding the current outlook and suggests policymakers remain split between concerns about persistent inflation and the risk of a tightening monetary policy.
For markets, the bigger story may be the guidance rather than the rate decision itself. A hike accompanied by a message that further tightening will remain data-dependent could be interpreted as a relatively benign outcome. Conversely, a hawkish hold that signals rates may need to stay higher for longer could still push Treasury yields higher and weigh on risk assets. Recent moves in the bond market underscore this sensitivity, with long-dated Treasury yields having climbed sharply amid expectations that inflation risks remain elevated.
From an investor perspective, we expect volatility across equities, bonds, and foreign exchange markets around the announcement. The US dollar could find support if the Fed hikes or maintains a hawkish stance, while growth-sensitive sectors such as technology may face renewed pressure from higher yields. However, given that markets have already priced a meaningful probability of tightening, the risk of a larger market reaction may come from any unexpected dovish shift in the Fed’s language or economic projections.”
Yufeng Qiu, Senior Trader, Lunaro Financial Services Limited
The probability of a Fed rate hike increased significantly since Chairman Kevin Warsh’s hawkish speech in Jackson Hole, as he pointed out that the Federal Reserve will maintain its absolute and fixed commitment to achieving a 2% inflation target. The CME FedWatch tool is currently pricing in a rough 87% probability of a 25 bps hike this Wednesday; this is an increase from the 67% probability before the latest CPI release.
All markets are already pricing in a rate hike as major equity futures have been drifting lower. Gold has also lost some strength since late August. The dollar has strengthened off the back of this as global investors shift capital into dollar-denominated assets to capture higher yields. Interestingly, major markets such as SPX and Gold have been hovering around major support levels, meaning that should there be a surprise hold in interest rates, then traders should theoretically see a reversal of trends.
Aliasgar Tambawala Co-CIO, Klay Group
“The US Federal Open Market Committee (FOMC) left the target range for the federal funds rate unchanged at 3.50%–3.75%, with the accompanying policy statement largely unchanged from June. The Committee continued to describe economic activity as expanding at a solid pace, labour market conditions as resilient, and inflation as remaining elevated, partly reflecting higher energy prices. It also reaffirmed its commitment to restoring price stability. Three members dissented from the Committee’s decision, preferring a 25bp increase.
However, the press conference proved to be the key focus for markets. Chair Kevin Warsh reiterated his preference to avoid providing forward guidance, arguing that markets should form their own assessment of the economic outlook. He also suggested that the recent tightening in market financial conditions, including higher market interest rates, could reduce the need for additional Fed policy tightening, without explicitly defining the conditions under which the Fed would raise rates.
Overall, the meeting appears to have created more confusion than clarity. While the policy decision itself was broadly in line with expectations, the subsequent press conference left markets with greater uncertainty about the policy outlook. Chair Warsh’s communication left investors with an unclear picture of the Fed’s reaction function. Consequently, markets reacted as much to the communication as to the policy decision itself, with longer-term Treasury yields and inflation expectations rising. We continue to believe that this lack of clarity reinforces the likelihood of higher interest rate volatility going forward. Markets are likely to continue testing the new Fed Chair until the Fed’s policy framework and reaction function become clearer.”