Fed now 'firmly expect' 25bp hike, next move is 'deliberately unclear'

We have changed our call for this week’s FOMC meeting, and now firmly expect the Fed to deliver a 25 basis point hike, even if only to preserve its waning credibility. Investors are in agreement, and futures are now only assigning around a one-in-ten chance of a hold.

The key variable is whether this marks the start of a tightening cycle, is a one and done move or something in between.

We are still not convinced that the case for hikes is particularly strong. Treasury yields continue to climb, acting as a form of tightening, core inflation is contained and the labour market, while resilient, is not firing on all cylinders.

Warsh will no doubt warn over the inflation risks posed by the Iran conflict, but we also expect him to leave the committee’s next move deliberately unclear, which could disappoint the rather hawkish expectations.

September is also a dot plot month, so investors will have the latest set of Summary of Economic Projections to pore over. A modest upgrade here to show one further hike in 2026 is possible, but not our base case, as the Fed has historically preferred to under promise and over deliver if needed with these projections.

An upgrade to the PCE inflation projections would hint at further hikes, without needing to explicitly indicate as much, though we think that the Fed will signal that second round effects remain contained for now. This would likely keep in check any possible gains in the dollar in the event of a 25 basis point hike.