The September FOMC decision is coming in just hours, with markets almost universally expecting a rate hike after last week's inflation data and oil futures living above $100.
The key question is how the dot plot changes alongside the decision.
We see three possible scenarios:
📌 Dovish: Rates remain unchanged, while the median dot rises to signal one rate hike this year.
📌 Neutral: Rates rise 25bp, with the median dot also signaling one rate hike this year, implying no further hikes after September.
📌 Hawkish: Rates rise 25bp, while the median dot signals two rate hikes this year, leaving room for another hike after September.
Before last week’s CPI and PPI releases, we viewed the dovish scenario as our base case. With inflation coming in above expectations and oil prices moving above $100, the probability of a September hike has increased significantly.
Still, a hike would not necessarily mean the Fed is turning firmly hawkish. Core inflation has not shown a broad-based reacceleration, so even if the Fed resumes tightening, the move could represent one or two precautionary hikes rather than the start of a sustained hiking cycle.
That distinction will matter for markets. Under the neutral scenario, a September hike could represent “bad news already priced in”: once the hike is delivered, uncertainty around this year’s rate path would diminish, potentially allowing long-term Treasury yields to peak and retreat.
The SEP will provide another important signal. If economic projections are maintained or raised while inflation projections remain unchanged, it would reinforce the view that any shift toward rate hikes is precautionary, with a low probability of consecutive hikes.
The decision arrives in hours. The hike matters, but the dot plot will tell us what comes next.
#FedRateWatch
The key question is how the dot plot changes alongside the decision.
We see three possible scenarios:
📌 Dovish: Rates remain unchanged, while the median dot rises to signal one rate hike this year.
📌 Neutral: Rates rise 25bp, with the median dot also signaling one rate hike this year, implying no further hikes after September.
📌 Hawkish: Rates rise 25bp, while the median dot signals two rate hikes this year, leaving room for another hike after September.
Before last week’s CPI and PPI releases, we viewed the dovish scenario as our base case. With inflation coming in above expectations and oil prices moving above $100, the probability of a September hike has increased significantly.
Still, a hike would not necessarily mean the Fed is turning firmly hawkish. Core inflation has not shown a broad-based reacceleration, so even if the Fed resumes tightening, the move could represent one or two precautionary hikes rather than the start of a sustained hiking cycle.
That distinction will matter for markets. Under the neutral scenario, a September hike could represent “bad news already priced in”: once the hike is delivered, uncertainty around this year’s rate path would diminish, potentially allowing long-term Treasury yields to peak and retreat.
The SEP will provide another important signal. If economic projections are maintained or raised while inflation projections remain unchanged, it would reinforce the view that any shift toward rate hikes is precautionary, with a low probability of consecutive hikes.
The decision arrives in hours. The hike matters, but the dot plot will tell us what comes next.
#FedRateWatch
