Markets price a first Warsh-era Fed hike as Wednesday’s meeting opens

The Federal Open Market Committee begins a two-day meeting on 15 September with markets and a clear majority of economists now pointing to a quarter-point increase in the federal funds rate, the first under Chair Kevin Warsh and the first since July 2023. The statement is due at 2 p.m. EDT on Wednesday, 16 September. A move would lift the target range from 3.50–3.75 percent to 3.75–4.00 percent.

A week ago the consensus still favoured a hold. Governor Christopher Waller had told a Reuters event to “give disinflation a chance,” citing cooler June and July readings. Friday’s inflation figures reversed that. Core CPI rose enough to undercut the idea that prices were sliding back to the 2 percent target on their own. Goldman Sachs dropped its hold call and now expects 25 basis points this week. J.P. Morgan expects a hike in September and another in December and raised its long-run policy-rate estimate to 3.25 percent. HSBC and Deutsche Bank joined the hike camp. CME FedWatch put the probability around 87 to 90 percent, up from about 67 to 70 percent before the print.

A Reuters poll of 101 economists taken after the data found 86 expecting a quarter point this week. Of 70 who gave a further path, 37 expect at least one more increase by the end of March. There is no longer a majority looking for lower rates in 2027. Futures imply roughly four increases by the end of July 2027. Goldman still writes down two cuts in 2027, only later than it had them.

Warsh set the tone at Jackson Hole in August. He kept the 2 percent PCE target fixed and said credit markets showed little restraint at 3.50–3.75 percent. PCE inflation then was 3.7 percent over twelve months and 4.1 percent at a six-month annualised pace. Markets moved the September odds from about 35 percent to about 60 percent on that speech alone. Oil has done the rest. Brent has traded above $100 as the East-West pipeline in Saudi Arabia sits in repair and the Red Sea route carries more of the kingdom’s crude.

J.P. Morgan’s Michael Feroli called the week one of rising bond yields, rising energy prices and inflation readings firm enough to make a hike more likely than not. He still thinks the call is closer than a 90 percent futures price. His point is institutional. Warsh has said, more than once, that he will not tolerate inflation staying high. A hold this week, after those remarks and after Friday’s print, would ask markets to treat the words as commentary.

The Summary of Economic Projections will be watched as closely as the rate. In June, nine of 18 participants pencilled in at least one 2026 hike; six of those nine wanted two. Eight wanted no change and one wanted a cut. The new dots are likely to move up on inflation and on the funds-rate path, and down on growth and unemployment. KPMG’s primer now counts on three hikes, with the risk to the upside, in quarter-point steps rather than the 2022 leaps.

Warsh has also dropped the old style of rate guidance. That is why so many desks refused to commit until the last print. The meeting that opens today is the first test of that silence. If the committee hikes and the dots show another move, the message is that 2 percent still has a policeman. If it holds, the message is that Waller’s patience still has a majority. Futures have already chosen.