#每周来晒 #美联储加息会议 FOMC Preview: A September Rate Hike Alone Will No Longer Be Enough to Calm the Credibility Crisis

The Federal Reserve will announce its September policy decision in the early hours of Thursday, September 17, Beijing time. Given the recent strength of US fundamentals, recurring tensions in the Middle East, and lingering risks at the long end of the US Treasury curve, we believe the Fed’s credibility would struggle to withstand the “blow” of not hiking rates in September, making a September hike a “must” for the Fed. More importantly, market pricing for the continuity and overall magnitude of Fed rate hikes has risen significantly recently. From the perspective of fundamentals and risk premia, we believe the Fed may need to hike rates three times cumulatively over this year and next. Therefore, the implementation of a September hike may only bring temporary stability. Given that Warsh will most likely refuse to provide forward guidance, markets will continue to repeatedly test the Fed’s credibility after the September FOMC meeting. If the Fed subsequently fails to signal further rate hikes, or even if the tail risk of no September hike materializes, the term premium on US Treasuries could rise again, “anti-fiat” trades could heat up rapidly, and US equities could come under significant pressure.

The Fed’s credibility would struggle to withstand the “blow” of not hiking rates in September, making a September hike a “must” for the Fed.
Since Warsh took office, the Fed’s credibility has been strengthened at the June FOMC meeting, damaged at the July FOMC meeting, and repaired at the August Jackson Hole central banking symposium. This has not only exhausted the market’s “patience,” but also pushed the Fed into a position where it seemingly has no choice but to deliver on its “promise.” Specifically, at the August Jackson Hole meeting, Warsh sent a clear hawkish signal to the market to make up for his “evasive” remarks at the July FOMC meeting. Although Governor Waller’s subsequent remarks calling for more patience on inflation briefly guided market rate-hike expectations toward a more balanced level, the August payrolls report far exceeded expectations, August CPI and PPI inflation picked up, and the ongoing conflict in the Middle East continued to push up oil prices. Even though there is room to debate the data—for example, the August payrolls report may have reflected an unusual subsequent catch-up, the rebound in housing costs in August CPI came from the highly volatile hotel accommodation component, and the rise in the communications component of August CPI resulted from a one-off disturbance caused by carriers collectively adjusting prices—the Fed’s credibility may struggle to withstand the “blow” of not hiking rates in September. We expect the Fed to initiate a rate hike in September.

Regarding the dot plot and economic projections, we expect the Fed to raise its projected number of rate hikes in 2026 and increase its inflation forecast.
In the dot plot, among the officials who submitted projections in June, nine expected at least one rate hike in 2026, while nine expected rates to remain unchanged or decline, with the median pointing to a modest rate hike. We expect the median number of rate hikes in 2026 in the September dot plot to rise to two. Regarding the economic projections, given that the Middle East conflict has lasted longer than expected, the Fed may make modest adjustments, lowering its 2026 growth forecast and raising its 2026 inflation forecast, while keeping its unemployment forecast unchanged or revising it slightly lower.

But even a September rate hike would not be enough to calm market doubts about the Fed’s credibility—or stabilize long-end US Treasury yields. Changes in market pricing have raised the cost of rebuilding the Fed’s credibility. The market is now pricing in an almost complete probability of a 25bp September hike, with the probability priced in the federal funds futures market close to 90%, and is pricing in three to four cumulative rate hikes by next June—effectively reversing all three preventive cuts made last year. Compared with the roughly two cumulative hikes priced in by next June in late August, market pricing is increasingly tilting toward a continuous hiking cycle. The structural contradictions behind the current rise in long-end yields also cannot be alleviated by a single rate hike.
Strong US nominal growth—with nominal growth still above the 10-year US Treasury yield—the Middle East energy shock, the crowding-out effect of long-duration financing by private-sector companies represented by AI firms, and the erosion of credibility in US macroeconomic policy—an unclear monetary-policy reaction function, weakened fiscal discipline, and buybacks “backfiring”—have all driven the current rise in long-end US Treasury yields. Structural problems such as fiscal sustainability and fiscal interventionism are particularly difficult to reverse. By contrast, given that Warsh will most likely continue to refuse to provide forward guidance, we believe the implementation of a September hike may bring only temporary stability. It is still unlikely to fully calm market anxiety over the Fed’s credibility, nor will it necessarily be sufficient to anchor long-end US Treasury yields. Whether subsequent consecutive hikes will materialize may continue to disturb markets intermittently.

The Fed may need to hike rates consecutively, and may need to reverse at least the three “preventive” cuts made in 2025; if it hikes only in September, the rate level will remain too low relative to nominal growth, while the Fed’s credibility will continue to be repeatedly “tested” by the market. We proposed as early as May this year that the Fed needed to hike rates, and our assessment at the time was that the Fed needed to hike twice by the middle of next year.

From the framework of fundamentals and risk premia, the Fed needs to hike rates three times consecutively. Fundamentally, US economic growth has remained relatively strong, with nominal growth reaching 6.9% in the first half of the year and US corporate earnings guidance remaining relatively high. In addition, the risk of a slowdown in the disinflation process has risen recently, as US-Iran tensions push up energy prices, low inventories of oil products heighten concerns over oil prices, and the transmission of the AI-driven wave of hardware price increases to downstream sectors becomes increasingly evident. AI capital expenditure expectations have also been revised higher following second-quarter earnings reports. We believe the number of rate hikes needed for the Fed to anchor inflation expectations should therefore be raised—that is, above two.
From a risk-premium perspective, given that Warsh has still not used “action” to prove the hawkish inclination he first expressed, and that the communication failure and “inconsistency between words and actions” at the July FOMC have begun to raise market doubts about the independence of his decisions—specifically, whether he is under pressure from the president—the number of hikes the Fed “should” deliver may be around three in order to repair its credibility to some extent. In other words, if the actual number of hikes is significantly lower than the number the Fed should deliver, it will fall further behind the curve, making long-end yields difficult to anchor and further damaging the Fed’s credibility.
If the Fed does not signal further rate hikes after September, or even if the tail risk of no September hike materializes, the term premium on US Treasuries could rise sharply and disorderly, “anti-fiat” trades could heat up rapidly, and short-term stock-market volatility could increase. In our preview of the August Jackson Hole meeting, we provided a scenario-analysis framework under which the only path for the Fed to repair its credibility or ease market concerns in the short term was “a hawkish Jackson Hole meeting plus a September FOMC hike.” But as analyzed above, whether due to recent marginal changes in fundamentals, shifts in the intensity of the Middle East situation, or the growing visibility of structural problems such as US fiscal issues, all factors point to an increase in both the continuity and magnitude of the rate hikes needed for the Fed to rebuild credibility. Therefore, if the Fed cannot provide guidance on subsequent rate hikes in September, or even remains on hold at the September meeting, the disorderly rise in long-end US Treasury yields may recur, rapidly heating up “anti-fiat” trades and driving the dollar lower and gold higher. For equities, rising long-end yields would create pressure on the denominator—the valuation side—while the numerator is unlikely to be revised significantly higher in the short term. If rates rise gradually and relatively orderly, the market may be pricing in more of an increase in the neutral rate driven by improving fundamentals, leaving room for the pressure to ease. But if the market prices in damage to the Fed’s credibility or uncertainty over the policy path, disorderly fluctuations in long-end yields could place even greater pressure on US equities.