To The Moon

High-ranking investment manager at abrdn suggests the probability of a September rate hike is roughly equal to the chance of holding steady, but the US Federal Reserve may be compelled to raise rates to demonstrate its commitment to curbing inflation.

The fixed income specialist noted that while the Fed held rates steady at its last meeting, three members voted for an increase, revealing internal disagreement over inflation risks. The odds for a September move are now finely balanced, though the outcome hinges on oil prices, inflation data, and developments in the Middle East.

"If inflationary pressures remain high with no signs of easing, and if the Strait of Hormuz stays blocked, pushing oil back to $90 or even above $100, the chance of a rate hike will increase significantly," the manager stated. "The current situation in the Middle East is volatile, tensions in the strait are high, and energy prices could rise further."

The manager added that the Fed's latest meeting has raised questions about its credibility. Chair Jerome Powell emphasized a firm commitment to the 2% inflation target but offered no clear direction or action, leading markets to doubt the Fed's resolve. For this reason, abrdn believes the Fed may be forced to raise rates in September to prove its determination and restore confidence in its inflation target.

If the Fed does not hike in September, it would suggest that inflation data from June to August is relatively favorable. In that case, an October hike seems unlikely, as one month of data would not dramatically change the situation. Typically, the Fed observes at least two months of data before making a rate decision, so if September passes without a hike, the chance of an October move is also low. The next decision point would likely be December.

With the Fed no longer offering forward guidance, the market will continue to guess its next move. Investors face significant uncertainty about the future rate path, and with the Middle East situation fluctuating between calm and tension, US Treasury yields are expected to remain highly volatile over the next two to three months.