The Federal Reserve is widely expected to deliver its first interest rate hike in over three years this week, but the market's real focus has already shifted beyond the simple question of whether rates will rise. All eyes are now on whether newly appointed Chair Kevin Warsh can secure a majority of FOMC support, how many dissenting votes ultimately surface, and whether this move marks a one-off action or the beginning of a fresh tightening cycle.
As of Monday afternoon, CME FedWatch data showed market pricing for a rate increase this week had climbed above 92%, with the 12 FOMC voting members projected to decide by Thursday morning Beijing time whether to lift the federal funds rate by 25 basis points from its current range of 3.50% to 3.75%. Concurrently, the market's assessment of another rate hike in December also surpassed 75%.
Former New York Fed President Bill Dudley noted that with the market having priced in a move so thoroughly, it would be "startling" if Warsh failed to act, undermining his credibility and turning the situation into one of "all talk, no action." Yet the rate hike itself is far from the end of the controversy. Strong August employment data, a resurgence in energy prices, and August CPI readings indicating persistently elevated inflation have all reinforced expectations for a move. On the other hand, a considerable portion of the current inflation uptick stems from tariff-related pressures and energy supply shocks linked to the Iran conflict, both of which carry lingering uncertainty regarding their long-term inflationary impact.
How the 12 voters lean: Can Warsh assemble a majority? The FOMC voted 9 to 3 in July to hold rates steady, with Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari all advocating for a hike at that time. Should those three maintain their positions, Warsh would need to sway at least four of the previous hold-voters to switch sides in favor of tightening. Among the most closely watched swing votes is Fed Governor Christopher Waller, who on September 3rd clearly indicated a preference for holding rates steady this time around, arguing the cost of waiting one meeting was limited since a single 25-basis-point increase wouldn't immediately bring CPI back to 2%. New York Fed President John Williams has also recently suggested that a "wait-and-see" approach appears more prudent, having previously expressed a view that US inflation might have already peaked. Philadelphia Fed President Anna Paulson and Chicago Fed President Austan Goolsbee similarly lean towards patience. Meanwhile, Fed Governor Michael Barr is concerned about transitory inflation pressures becoming more persistent, and while he is open to a rate increase, he has not explicitly committed to one. On the other side, Warsh is expected to stand firmly in the hiking camp. Fed Governor Lisa Cook stated in early August that she was "prepared to act" in response to inflation. Consequently, the final vote tally will serve as a key metric for observers assessing Warsh's leadership. David Kelly, Chief Global Strategist at JPMorgan Asset Management, believes that even if the FOMC appears visibly divided, should a majority ultimately decide to hike, some previously wavering officials may opt to join in to present a more unified front to the public and the president. He posits that dissent could ultimately be limited to just two votes, one vote, or possibly none at all.
After the hike: A one-off move or the start of a cycle? Another critical question revolves around how Warsh will frame the action to the market. If this is merely a "preventive hike" targeting oil price and tariff shocks, a pause could follow. But if the committee perceives that price pressures are becoming entrenched, the move could signify the dawn of a new tightening cycle. Goldman Sachs Chief US Economist David Mericle previously argued that from an economic fundamentals standpoint, there wasn't a strong case for a hike, as most inflation above 2% could be attributed to one-off factors whose impact would eventually fade. However, Goldman subsequently shifted its call from "hold" to "hike," driven primarily by the entrenched market expectations that might compel the Fed to act. Mericle suggested that if this week's hike results in a fragmented vote, such as a 10-to-8 split among the 18 FOMC participants, it could indicate that some officials are reluctant about the initial increase and don't wish to fuel further market expectations for subsequent moves. Conversely, if more members view the oil price surge and AI-investment-driven demand as persistent inflationary forces, support for two hikes before year-end could strengthen. Following the decision, market attention will pivot to the Fed's updated "dot plot." This iteration will for the first time include rate projections for 2029. Investors will be keenly focused on whether a second hike is anticipated this year and the trajectory laid out for 2027. Given Warsh's historically cautious stance on "forward guidance," his press conference remarks will be especially scrutinized. Dudley believes Warsh needs to use tangible action to remedy previous communication issues and clearly articulate the Fed's assessment of the current economy.
Dissent: Could a hike actually harm the economy? Despite the market's overwhelming expectation of a rate increase, some economists caution that the Fed may be veering towards a policy misstep. Moody's Chief Economist Mark Zandi warned that the probability of a "serious policy error" is now rising at an uncomfortable pace. He argued that during a period of slowing economic growth, it's difficult to avoid job losses and rising unemployment, and once a negative feedback loop forms, it could eventually trigger a recession. Northern Trust Chief Economist Carl Tannenbaum also believes the case for a hike isn't as clear-cut as the market and some commentators suggest. While the economy currently shows resilience despite war and tariff shocks, it is not "invulnerable." Lower-income households are tapping into savings to cope with inflation, and holding rates steady would give the central bank more time to observe whether cracks appear in the economy. Steve Englander, Global Head of G10 FX Research, argued that raising rates prematurely, while inflation data presents clearly mixed signals, is unwise. If the Fed hikes only to reverse course and cut rates a few months later, the market might conclude Warsh's "hand isn't steady" at the helm. Michael Strain, Director of Economic Policy Research at the American Enterprise Institute, also suggested the market may be overestimating the probability of a hike. He noted that the "center of gravity" inside the Fed still leans towards holding rates steady, and that excluding energy prices and tariff effects, underlying US inflation might be around 2.5%. Michael Pearce, Chief US Economist at Oxford Economics, similarly maintained a prediction of no move in September, believing the final decision could still swing in either direction.
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