#每周来晒 #美联储加息会议 FOMC Outlook: A September rate hike alone is no longer enough to ease the credibility crisis

In the early hours of Thursday, September 17, Beijing time, the Federal Reserve will announce its decision on interest rates at its September meeting. Given the recent strength of the U.S. economy’s fundamentals, volatility in the Middle East, and the continued risk of long-term maturity pressures on U.S. Treasury bonds, we believe the Federal Reserve’s credibility would struggle to withstand the “blow” of not raising rates in September, making a September hike a “mandatory option” for the Fed. More importantly, market pricing for the continuity and total scale of rate hikes has risen clearly in recent days. From the perspective of the fundamentals and risk-premium framework, we believe the Fed may need to raise rates three times cumulatively this year and next year. Therefore, implementing a rate hike in September may only bring temporary stability. With Wash likely to reject providing forward guidance, the market will continue testing the Fed’s credibility repeatedly after the September FOMC meeting. If the Fed subsequently fails to provide guidance on continuing to raise rates, or if even a marginal risk emerges that it will not raise rates in September, the term premium on U.S. Treasuries could rise sharply again, anti-fiat trading could accelerate, and U.S. equities could come under clear pressure.
The Fed’s credibility would struggle to withstand the “blow” of not raising rates in September, making a September rate hike a “mandatory option” for the Fed.
Since Wash took office, the Fed’s credibility strengthened at the June FOMC meeting, declined at the July FOMC meeting, and then recovered at the central banks’ annual meeting in Jackson Hole in August. This not only exhausted the market’s “patience,” but also pushed the Fed into a position in which it appears compelled to fulfill its “commitments.” Specifically, at the August Jackson Hole meeting, Wash sent the market a clear hawkish signal to offset his “ambiguity” at the July FOMC meeting. Although Governor Waller’s remarks about giving inflation more time temporarily shifted market rate-hike expectations toward greater balance, August nonfarm payrolls far exceeded expectations, inflation in the August CPI and PPI rose, and the conflict in the Middle East continued to push oil prices higher. Even allowing for debate over the data—such as August nonfarm payrolls later offsetting an unusual deviation, the rebound in the August CPI shelter component resulting from highly volatile hotel accommodation, and the rise in the CPI communications component due to a one-off disruption caused by telecom companies collectively adjusting their prices—the Fed’s credibility may struggle to withstand the “blow” of not raising rates in September, and the Fed is expected to begin raising rates in September.
Regarding the dot plot and economic projections, the Fed is expected to raise the number of rate hikes projected for 2026 and increase its inflation forecasts.
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 be cut, and the median indicated a slight rate hike; the median number of rate hikes projected for 2026 in the September dot plot is expected to rise to two. As for the economic projections, given that the conflict in the Middle East has lasted longer than expected, the Fed may make a slight adjustment by lowering its 2026 growth forecast, raising its 2026 inflation forecast, and leaving its unemployment-rate forecast unchanged or lowering it slightly.
But even a September rate hike will not be enough to ease market doubts about the Fed’s credibility (or to stabilize long-term U.S. Treasury yields). Changes in market pricing have increased the cost of rebuilding the Fed’s credibility. The market is currently pricing in a 25-basis-point hike in September almost fully (with the implied probability in the federal funds futures market approaching 90%), as well as 3–4 cumulative rate hikes before June next year—that is, a complete reversal of the three preventive cuts implemented last year—compared with roughly two cumulative hikes priced in before June next year in late August. Market pricing is increasingly moving toward a sustained rate-hike cycle. A single rate hike would also struggle to ease the structural contradictions underlying the rise in long-term yields during this cycle.
The strength of U.S. nominal growth (with nominal growth still above the 10-year U.S. Treasury yield), the Middle East energy shock, the crowding-out effect from long-term private-sector financing, particularly for AI companies, and damage to the credibility of U.S. macroeconomic policies (ambiguity over the monetary policy reaction function, weak fiscal discipline, and the counterproductive results of buybacks) are all driving the rise in long-term U.S. Treasury yields in this cycle. Structural problems, particularly fiscal sustainability and fiscal interventionism, are increasingly difficult to reverse. Meanwhile, since Wash will likely reject providing forward guidance, we believe a September rate hike may provide only temporary stability. It will remain difficult to fully ease market concerns about the Fed’s credibility, and it may not be enough to stabilize long-term U.S. Treasury yields, while the realization of successive rate hikes could continue to cause temporary market disruptions.
The Fed may need to raise rates successively and may need at least to reverse the three “preventive” cuts implemented in 2025; if it only raises rates in September, the interest-rate level will remain far too low relative to nominal growth, and the market will continue to “test” the Fed’s credibility repeatedly. In May this year, we argued that the Fed needed to raise rates, estimating at the time that it needed to raise them twice before the middle of next year.
From the perspective of the fundamentals and risk-premium framework, the Fed needs to raise rates three times successively. On the fundamentals side, the U.S. economy is maintaining strong growth (nominal growth reached 6.9% in the first half of the year, and guidance for earnings at listed U.S. companies remains strong), while risks of a slowdown in the disinflation process have recently increased (higher energy prices due to U.S.-Iran tensions, growing concern over oil prices as a result of declining petroleum-product inventories, and increasingly clear pass-through of the AI-driven surge in equipment prices to later stages), alongside higher AI capital-expenditure expectations following second-quarter earnings reports. We believe the number of rate hikes needed by the Fed to anchor inflation expectations should rise—that is, exceed two.
On the risk-premium side, since Wash has not yet demonstrated through “action” the hawkish inclination he initially expressed, and the communication failure and “inconsistency between words and actions” at the July FOMC meeting have begun to raise market doubts about the independence of his decisions (and whether he is under pressure from the president), the number of rate hikes the Fed “should” implement may be around three, with the aim of restoring its credibility to some extent. In other words, if the actual number of rate hikes falls far short of the number it should implement, the Fed will lag the market’s path even further, making it difficult to stabilize long-term yields and further damaging the Fed’s credibility.
If the Fed does not signal continued rate hikes after September, or if even a marginal risk emerges that it will not raise rates in September, the term premium on U.S. Treasuries could rise sharply and disorderly, anti-fiat trading could accelerate, and short-term volatility in the equity market could widen. In our August Jackson Hole meeting outlook, we provided a framework for analyzing the scenarios and concluded that the only path through which the Fed could repair its credibility in the short term or ease market concerns was “Jackson Hole hawkishness + a rate hike at the September FOMC meeting.” But as explained above, whether the issue is recent marginal changes in the fundamentals, a shift in the intensity of the situation in the Middle East, or the emergence of structural problems such as U.S. fiscal policy, they all point to an increase in the continuity and scale of rate hikes needed to rebuild the Fed’s credibility. Therefore, if the Fed cannot provide guidance on subsequent rate hikes in September, or refrains from raising rates at the September meeting, the disorderly rise in long-term U.S. Treasury yields could recur, accelerating anti-fiat trading, weakening the dollar, and lifting gold. For the equity market, higher long-term yields would pressure the denominator, namely valuations (while it would be difficult to raise the numerator materially in the short term). If yields rise gradually and relatively orderly, the market may price in to a greater extent a higher neutral rate resulting from stronger fundamentals, leaving room for pressure to ease. But if the market prices in damage to the Fed’s credibility or uncertainty over the policy path, and long-term yields fluctuate disorderly, pressure on the U.S. equity market will likely be greater.