Here is my take on whether there will be a hike next week or not.
Next week’s FOMC meeting (Sept 15–16) is being priced as a coin flip with a slight tilt toward a 25 bp hike. CME FedWatch and similar tools have been hovering around 56–60% odds of a quarter‑point increase after the August jobs report and Chair Kevin Warsh’s Jackson Hole remarks. A Reuters poll of economists still leans “hold,” but the share expecting at least one 2026 hike has risen sharply. Brokerages like UBS now forecast two 25 bp hikes this year (September and December), citing resilient labor data and sticky inflation.
Even this morning, I saw a Wall Street Journal piece headlined “Report boosts odds of rate rise to almost 90% from 70%,” underscoring how quickly the narrative can shift.
Inflation is still firm enough to justify a small hike. Headline CPI held at 3.4% y/y in August, while the monthly gain hit 0.4%, led by a 3.9% jump in gasoline. Shelter and food cooled modestly, but energy stayed hot (gasoline +27.4% y/y; fuel oil +52% y/y). Core CPI slowed to 2.4% y/y but rose 0.3% m/m.
Here’s the political–fiscal layer I think we face: Midterm elections are coming, and Trump needs rate cuts to show economic success. Don’t forget that Kevin Warsh was selected by Trump. So Warsh can hike for now, but over time the administration needs rates to come down—simply because of the huge public debt. With oil prices rising again, inflation will be hard to control, which puts the Fed in a bind: hike to protect credibility, or cut to ease fiscal pressure.
Put differently, the man who could give Trump what he wants is Fed Chair Kevin Warsh. Publicly, he can’t just lower rates while diesel and refinery costs surge and inflation prints stay firm. Privately, though, the math is unforgiving: mandatory outlays—interest on the debt, Social Security, Medicare, and veterans’ benefits—now exceed total federal revenues. When that spending grows faster than revenues, every rate increase makes the debt burden worse.
My take (MacroXX): There might be a small one—maybe 0.25%—but it could still trigger a stock‑market wobble. A token hike signals the Fed is still serious on inflation, which should calm bond vigilantes at the margin. Yet vigilantes aren’t dumb. They’ll see through a “credibility” move if underlying price pressures (especially energy) and fiscal math don’t improve, and they’ll demand more term premium anyway.
Why the market is nervous
Inflation vs. credibility: Cut into rising prices and long‑end yields can jump; hold/hike and you keep pressure on rate‑sensitive assets.
Fiscal strain: With mandatory outlays running hot, each extra percentage point of rates worsens the budget arithmetic.
Buyer mix: Foreign official Treasury holdings have been mixed—some countries trimming, others steady—while global central banks have added gold, a diversification signal rather than a clean exit.
What would change my mind
A clear downside surprise in the next inflation print could push the Fed to pause despite the jobs strength.
Conversely, another hot CPI/PCE would make the 25 bp hike look like the minimum credible move, not the last one.
Expect a possible +0.25% next week, a brief equity drawdown as risk assets reprice, and then the real test: whether bond investors treat this as a one‑off credibility gesture or the start of a longer tightening leg. My guess: they’ll wait for more evidence before fully standing down.
This article is for educational and informational purposes only and should not be considered investment advice.