Den amerikanske centralbank står foran et usædvanligt FOMC-møde, hvor selve rentebeslutningen næsten er blevet sekundær. Markedet forventer med omkring 90 pct. sandsynlighed en forhøjelse på 25 basispoint, men både Goldman Sachs og JPMorgan peger på, at den afgørende markedsreaktion vil afhænge af Feds såkaldte “dots” og FED-chef Kevin Warshs forklaring af, om onsdagens renteforhøjelse er en enkeltstående justering – eller begyndelsen på en ny stramningscyklus. Paradoksalt nok kan den største kortsigtede markedsrisiko være, hvis Fed slet ikke hæver renten.
Det er hovedbudskabet i dette FOMC-preview, baseret på vurderinger fra blandt andre Goldman Sachs, JPMorgan, Oxford Economics og Wall Street Journals Fed-kommentator Nick Timiraos.
Markedet er gået fra 30 til 90 pct. sandsynlighed
For blot to uger siden vurderede markedet sandsynligheden for en amerikansk renteforhøjelse til omkring 30 pct. Siden er forventningen eksploderet til over 90 pct. efter tre begivenheder: Warshs markant inflationsfokuserede tale i Jackson Hole, et stærkere amerikansk arbejdsmarked end ventet og senest en højere kerneinflation i august. En Reuters-måling viser samtidig, at 85 pct. af 101 økonomer forventer en forhøjelse på 25 basispoint til 3,75-4,00 pct.
Makrobilledet giver Fed argumenter for at stramme. Kerneinflationen steg 0,3 pct. i august mod forventet 0,2 pct., mens den amerikanske økonomi skabte 162.000 job mod kun 56.000 ventet. Det betyder, at Fed står med en kombination af fortsat inflation over målsætningen og et arbejdsmarked, der foreløbig ikke viser tegn på et alvorligt tilbageslag.
Warsh har samtidig gjort det politisk og kommunikativt vanskeligere for Fed at holde renten uændret. I Jackson Hole fremhævede han, at PCE-inflationen stadig ligger klart over 2 pct., og at de underliggende inflationstendenser “ikke meningsfuldt er forbedret”. Han vurderede desuden arbejdsmarkedet som værende omkring fuld beskæftigelse og økonomien som robust, blandt andet understøttet af AI-relaterede investeringer.
Goldman: Fed hæver måske mest, fordi markedet forventer det
Den mest opsigtsvækkende vurdering kommer fra Goldman Sachs. Banken har ganske vist ændret sin prognose og forventer nu en renteforhøjelse på 25 basispoint. Men Goldman mener samtidig, at det fundamentale økonomiske argument for en forhøjelse er beskedent.
Bankens vurdering er, at hele overskridelsen af Feds 2 pct.-mål kan forklares af midlertidige faktorer, som gradvist bør forsvinde. Kerne-PCE-inflationen fra juni til august svarer ifølge Goldman til en annualiseret takt på omkring 2,5 pct., når kommende metodeændringer indregnes. Goldman vurderer desuden, at inflationspresset er mindre bredt, når midlertidige toldeffekter renses ud.
Goldmans mere kontroversielle pointe er derfor, at Fed delvist kan være blevet fanget af markedets egen prisning: Når markedet allerede har sat sandsynligheden for en forhøjelse til næsten 90 pct., risikerer Fed en voldsom markedsreaktion, hvis centralbanken pludselig vælger at holde renten i ro. Derfor forventer Goldman en renteforhøjelse – men uden klare signaler om, at flere nødvendigvis følger efter.
Det betyder, at onsdagens rentemøde potentielt bliver et klassisk eksempel på, at 25 basispoint i sig selv betyder mindre end kommunikationen efter beslutningen.
“Dots” bliver vigtigere end selve rentehoppet
Feds nye økonomiske prognoser og især det såkaldte dot plot bliver derfor afgørende.
Det centrale spørgsmål er, om medianen blandt FOMC-medlemmerne viser én eller to renteforhøjelser i 2026. Goldman forventer en meget snæver 10-8-fordeling til fordel for kun én renteforhøjelse i år, blandt andet fordi flere medlemmer kan være skeptiske over for allerede den første forhøjelse og ikke ønsker at skubbe markedet i retning af en længere stramningscyklus.
Der er imidlertid en reel risiko for, at dots viser to forhøjelser. Hvis det sker, vil markedet kunne læse beslutningen som starten på et egentligt nyt renteforløb drevet af højere oliepriser, stærk efterspørgsel og AI-investeringer.
Det historiske mønster taler også imod en isoleret forhøjelse. Ifølge Timiraos har Fed kun én gang – i 1997 – gennemført en renteforhøjelse, som ikke blev fulgt af flere. Markedet priser aktuelt næsten fire 25-basispoint-forhøjelser frem mod oktober 2027.
Normalt ville en uventet mere lempelig centralbank være positiv for aktier. Men JPMorgan peger på det modsatte denne gang.
Hvis Fed ikke hæver renten, vurderer JPMorgan, at det kan rejse spørgsmål om centralbankens troværdighed og skabe et kraftigt fald i de korte renter. Banken anslår, at den amerikanske 2-årige statsrente i det scenarie kan falde omkring 20 basispoint.
Samtidig vurderer JPMorgans aktieteam, at en uventet rentepause kan sende S&P 500 ned med omkring 1,25-1,75 pct., fordi markedet kan frygte højere langsigtede inflationsforventninger og stigende lange renter. Omvendt ventes en forhøjelse på 25 basispoint uden nye guidance-signaler at kunne løfte aktiemarkedet moderat.
Det er en usædvanlig markedslogik: En renteforhøjelse kan blive modtaget positivt, fordi den bekræfter Feds reaktionsmønster, mens en mere lempelig beslutning kan udløse uro om centralbankens troværdighed.
Warsh skal forklare Feds “reaktionsfunktion”
Det største kommunikative problem for Warsh bliver derfor at forklare, hvorfor Fed hæver netop nu.
Kritikere – blandt andre tidligere Fed-guvernør Stephen Miran – fremhæver ifølge artiklen, at underliggende inflation snarere er på vej ned, og at det derfor vil virke inkonsistent, hvis Fed bliver mere høgeagtig samtidig med faldende inflationstal. Hans kritik er, at markedet skal kunne forstå den økonomiske model, der kobler data til Feds beslutninger – ellers risikerer pengepolitikken at fremstå tilfældig.
Goldman peger tilsvarende på, at Warshs forklaring af, hvordan de seneste data har ændret Feds vurdering, bliver “million dollar question”.
Konsekvensen for dollar, renter og aktier
Markederne er allerede positioneret til en renteforhøjelse. Derfor er barren høj for en egentlig høgeagtig overraskelse.
Goldmans FX-team vurderer, at dollaren især vil reagere på, om Fed signalerer, at onsdagens forhøjelse er “one and done”. Hvis Fed hæver, men samtidig lægger en høj bar for yderligere stramninger, kan en stor del af den ellers positive dollareffekt forsvinde.
På obligationsmarkedet ventes en forsigtig Fed-kommunikation efter en forhøjelse at kunne stejle rentekurven, mens tydeligere signaler om flere renteforhøjelser vil øge presset på de korte renter og holde kurven fladere.
Den centrale pointe er derfor, at onsdagens FOMC-møde ikke først og fremmest handler om, hvorvidt Fed hæver renten med 25 basispoint. Det forventer næsten alle allerede.
Det afgørende bliver, om Fed præsenterer forhøjelsen som en isoleret forsikring mod inflation – eller som første skridt i en ny stramningscyklus.
Og den mest paradoksale risiko er, at Fed allerede er blevet så låst af både Warshs egen retorik og markedets forventninger, at en rentepause, som normalt ville blive betragtet som lempelig, i stedet kan udløse større markedsuro end selve renteforhøjelsen.
——————————————————————————–
Uddrag fra JP Morgan, Goldman, Newsquawk og Zerohedge
Summary
- 85% of forecasters expect the Fed to hike 25bps, while money markets price in a c. 90% probability of a hike.
- Hike expectations strengthened following the hotter-than-expected August core CPI print.
- Dot plot eyed for whether policymakers expect further hikes beyond September.
With Warsh’s credibility on the line (it’s a totally different question if he cares, more on that shortly) having painted himself into a corner at Jackson Hole, the latest consensus is for the Federal Reserve to hike rates on Wednesday by 25bps, taking the target range for the Fed Funds Rate to 3.75-4.00%. The scene was the at Jackson Hole with Warsh’s unexpectedly hawkish speech, this was followed by blowout August jobs report two weeks ago, which gave the Fed greater scope to tighten policy without immediate concern over the employment side of its mandate, and culminated with the hotter-than-expected August core CPI print, all of which sent expectations for a 25bps hike soaring from 30% two weeks ago to over 90% (with Scott Skyrm even hinting at a small chance of a 50bps hike tomorrow).
Meanwhile, as Newsquawk writes in its FOMC preview, Warsh’s recent inflation-focused rhetoric has contributed to a debate around Fed credibility. At Jackson Hole, Warsh placed significant emphasis on returning inflation to target and said the Fed still had work to do unless underlying inflation resumed clear progress towards 2%. Following the hotter August core CPI M/M print, many argue that holding rates steady could therefore sit awkwardly alongside his recent messaging (even if the economy does not actually need a rate hike, a view notably carried by Goldman).
Nevertheless, a hike is not guaranteed. Around 15% of economists surveyed by Reuters expect the Fed to hold rates steady, while
markets are not yet fully pricing a hike. Governor Waller also leaned towards a hold ahead of the blackout period in a speech just before the payrolls report which was oddly dovish, saying he would support keeping rates unchanged if the August inflation data showed continued progress, although importantly he added that he would consider a hike if inflation came in hot.
Financial conditions provide another consideration. Warsh has previously appeared comfortable with some tightening in financial
conditions, suggesting it can help the Fed achieve its objectives. The recent backup in Treasury yields and associated tightening in
financial conditions could therefore be doing some of the Fed’s work.
Alongside the rate decision, the Fed will publish its updated Summary of Economic Projections (SEPs). Warsh is expected to refrain from submitting his own forecasts, as he did last time, given his aversion to forward guidance, but the projections and dot plot from other FOMC participants will be closely scrutinized for clues on the future policy path. WSJ’s Timiraos recently highlighted the historical tendency for Fed hikes to come in sequences, citing former Fed Vice Chair Richard Clarida, who said: “If we get a hike next week, certainly we’ll get additional ones.” Timiraos noted that the Fed has only once delivered a one-and-done hike, and that was in 1997. Sure enough, most banks expect 2-3 more hikes into early 2027 before the Fed reassesses.
Expectations:
The Federal Reserve is widely expected to hike rates by 25bps on Wednesday, taking the target range to 3.75-4.00%, after August
inflation data showed a hotter-than-expected core CPI print. Prior to the jobs and inflation reports, the consensus had been for rates to remain unchanged, although many desks subsequently shifted their calls towards a hike.
The consensus is not unanimous. The latest Reuters poll found 85% of 101 economists expect the Fed to hike, with the remainder looking for rates to remain unchanged. Looking further ahead, around 53% of forecasters expect another hike by the end of March 2027. Money markets, meanwhile, are pricing around a 90% probability of a hike on Wednesday and almost three hikes between now and March.
Although a hike is the clear consensus, Oxford Economics argues that the dovish case should not be dismissed. The desk expects the decision to be close, with what it characterizes as a third consecutive set of moderate inflation data narrowly supporting a majority for holding rates steady. Oxford Economics acknowledges that the surge in oil prices and elevated inflation create a risk-management case for tightening, but notes that officials do not typically react to every move in markets and argues that tighter financial conditions are already doing some of the Fed’s work in restraining inflation.
Economy:
August US CPI saw headline inflation accelerate to 0.4% M/M from 0.1%, in line with expectations, while the Y/Y rate was unchanged at
3.4%, also as expected. More importantly for the Fed, core CPI rose 0.3% M/M, above the 0.2% forecast and prior, while the Y/Y rate eased to 2.4% from 2.5%, in line with expectations. The hotter core monthly print further cemented expectations for a 25bps Fed hike, particularly following Warsh’s inflation-focused Jackson Hole commentary.
The labor market has also remained resilient, removing some of the downside risk that could otherwise argue against tighter policy.
The US economy added 162k jobs in August, well above the 56k forecast and the upwardly revised 21k increase in July. June payrolls were also revised higher by 11k to 31k, easing some of the labour-market concerns that had emerged heading into August. Meanwhile, initial jobless claims have remained low and relatively stable, consistent with a low-hire, low-fire labour market.
Taken together, the recent data leave the Fed facing an economy with a resilient labor market but inflation still running above target, placing greater emphasis on the inflation side of its mandate heading into Wednesday’s decision.
Warsh:
Warsh’s message at Jackson Hole was heavily focused on inflation. He noted that 12-month PCE inflation stood at 3.7%, while the six-month rate was 4.1%, both well above target, and stressed that more than half of PCE components were still rising at rates above 3%. Warsh said underlying inflation trends “have not meaningfully improved”, despite better-than-expected readings over the summer, and warned that the Fed has more work to do unless progress towards its 2% objective resumes.
Warsh again placed particular emphasis on price stability, while judging the labor market to be consistent with full employment. On growth, he described the economy as resilient and strengthening, pointing to AI-driven CapEx as an important source of support. He also said he would be “hard pressed” to describe financial conditions as restrictive, citing tight credit spreads, easier bank lending standards and firm equity markets. The combination of resilient activity and elevated inflation therefore gave the Fed little reason to ease, although, as expected, Warsh provided no explicit forward guidance.
At the previous meeting, Warsh also suggested that the tightening in financial conditions provided some comfort that markets were helping the Fed achieve its objectives. The subsequent backup in Treasury yields has tightened conditions further, potentially reducing some of the urgency for the Fed itself to tighten policy.
There has also been considerable discussion around Fed credibility heading into the meeting, with some arguing that Warsh’s Jackson Hole rhetoric, followed by the hotter August core CPI print, has raised the bar for the Fed to remain on hold. A hold could therefore risk undermining the consistency of Warsh’s recent inflation-focused messaging, particularly after he stressed that the Fed has more work to do unless progress towards the 2% target resumes.
A surprise hold would likely trigger a significant dovish repricing at the front end, with yields falling as markets unwind expectations for near-term tightening. It would also spark a stock market selloff according to JPMorgan (see below).The curve could consequently steepen, potentially sharply if concerns around Fed credibility and the inflation outlook also put upward pressure on term premium and long-end yields.
Waller:
Governor Waller provided the clearest dovish counterweight ahead of the blackout period, signalling a preference to keep rates unchanged in September if August inflation data showed continued progress. However, he importantly added that he “would consider a hike” if inflation came in hot.
Waller remains relatively optimistic on the inflation outlook, saying he is seeing signs of disinflation and arguing that underlying inflation is performing better than the core figures suggest. While acknowledging “some” upside risk to inflation, he said wage growth is consistent with inflation returning to 2% and argued that policymakers can afford to give disinflation more time, noting that “there is little
cost to waiting one meeting.”
On inflation measures, Waller said he focuses on core inflation because headline inflation can be noisy and argued that headline and core PCE are not necessarily the best guides to underlying inflation. Regarding August inflation, he declined to specify a precise threshold but said a three-month inflation rate of around 2.8% would be acceptable. Nevertheless, his comments suggested that it may not require a substantial reacceleration in inflation to justify tighter policy.
Pantheon Macroeconomics notes that “the three-month average of annualized month-to-month changes in the deflator, cited by Governor Waller as a key metric, probably dropped to 2.3% in August (again on the new methodology), from 2.7% in May.” However, Pantheon cautions that “the residual seasonality in the numbers means
WSJ’s Timiraos:
Following Friday’s US CPI report, WSJ’s Timiraos (the former Nikileaks has been snubbed on several occasions by both Warsh and Bessent) highlighted that while the Fed now appears poised to raise rates, historically it has rarely stopped after a single hike. Timiraos noted that the Fed has delivered a one-and-done rate hike only once, in 1997, and cited former Fed Vice Chair Richard Clarida, who said: “If we get a hike next week, certainly we’ll get additional ones.”
That makes the path beyond September particularly important. Markets are currently pricing just under four 25bps hikes by October 2027, according to CME FedWatch data. Therefore, if the Fed delivers the expected hike on Wednesday, attention will quickly shift from the decision itself towards whether policymakers view it as an isolated adjustment or the beginning of a broader tightening cycle.
A Hike without a signal:
Having kept its forecast for an unchanged Fed all year, on Friday, Goldman finally capitulated and added a 25bp rate hike at this week’s September FOMC meeting to its forecast following the August CPI report. According to the Goldman economist team, while the CPI report had little impact on the bank’s inflation view, it pushed market pricing of the probability of a hike to nearly 90%, which puts pressure on the FOMC to deliver a hike to avoid the market reaction that would likely follow from remaining on hold. As such, Goldman’s key expectation for this week is that the FOMC will be careful not to signal that further hikes are necessarily coming, either in the statement or in the dots, where a narrow majority will show one hike this year.
A little bit more on the first point: Goldman does not see a strong economic case for raising the funds rate. That’s because the bank estimates that all of the overshoot of the 2% target can be attributed to one-time factors whose impact is likely to fade, while the improvement in core PCE inflation from June through August rounds to an annualized pace of around 2.5%, inclusive of the likely impact of the upcoming methodological revisions, as early evidence of this.
The bank also does not see high inflation as particularly broad-based. While more categories than usual have seen prices grow at a 3%+ annualized rate over the last six months, as Chairman Warsh noted in his Jackson Hole speech, the share looks more comparable to past periods of 2% inflation once we net out estimated tariff effects, which are likely now largely behind us. And while a number of Fed officials have emphasized that inflation has been high for over five years, inflation expectations look at most modestly elevated and not at immediate risk of unanchoring, in part because the last five years of high inflation followed more than ten years of low inflation.
Most importantly, macroeconomic evidence (as well as common sense) suggests that limited rate hikes are unlikely to appreciably offset the much larger inflationary effects of supply shocks. This means that whether the FOMC raises the funds rate somewhat or not, it will still mainly be waiting for the impact of past shocks to fade naturally with time. Some FOMC participants likely share our inflation views and also see the last few months as a step in the right direction. As a result, Goldman thinks the FOMC will be reluctant to signal any additional hikes this week.
Statement:
With the FOMC statement already extremely sparse in the Warsh era, the FOMC will likely make only the minimum necessary changes to the statement, which will likely note that the FOMC is hiking in support of the goal of returning inflation to 2% but will likely avoid providing guidance on the path forward or the criteria for further hikes. This is what the Goldman proposed redline looks like:
Dissents:
Goldman expects Governor Waller to dissent because the annualized rate of core PCE inflation over the last three months (inclusive of likely revisions) appears to have slowed to about 2.5%, below the 2.8% threshold for staying on hold that he set in a recent public appearance. Furthermore, the bank sees both no dissents and two dissents as plausible alternatives to its base case.
Summary of Economic Projections:
Alongside the rate decision and statement, the Fed will release its updated Summary of Economic Projections. Warsh is expected to
refrain from submitting his own projections again, given his distaste for forward guidance. Nonetheless, the projections and dot plot
from the other FOMC participants will be closely scrutinized for the Committee’s broader views on the economy and the appropriate
path for monetary policy.
The economic projections are likely to show slightly lower headline and core inflation, mainly reflecting an expected downward revision from methodological changes later this month. The impact of the revisions is uncertain, but Waller’s recent speech implied that the Fed staff expects a meaningful downward revision. Goldman expects only minor changes to the GDP growth and unemployment rate projections.
Dots:
The key question for the September meeting is whether the median dot will show one hike or two in 2026. Goldman expects a 10-8 majority to show only one hike this year (or no hikes, in the case of Waller and possibly others) because some participants might be ambivalent about the first hike and some might want to avoid pushing market expectations for additional hikes any higher. But there is a risk of a majority for two hikes if many of the participants who might have mixed feelings about a hike this week for the reasons discussed above instead see it as a normal response to higher oil prices and AI demand and the start of a series of rate hikes.
The 2027 and 2028 medians are likely to show one cut each, remaining at 3.625% and 3.375%. The means are likely to rise a bit in both cases. While the great majority of participants will likely show at least one cut in 2027, it is possible that the 2027 median will be higher than 3.625% because participants projecting different numbers of hikes this year will envision cuts starting from different levels.
Finally, the neutral rate estimate may creep a bit higher at this meeting on a mean basis and probably on a median basis. It will continue rising gradually over the next year to about 3.25-3.5%, in part because the longer the economy performs well at higher interest rates, the more likely FOMC participants are to conclude that we might already be near neutral, and in part because some FOMC participants might conclude that AI investment demand is raising the equilibrium interest rate.
Guidance:
The FOMC will likely want to nudge the market away from pricing an October hike too confidently – it is already nearing 50% – but will not do that in the statement as the Fed is no longer in the forward guidance business. Instead, Chairman Warsh could say in his press conference that before deciding on further steps, the FOMC will “carefully assess” incoming data or will want to see upcoming inflation reports (plural) or how the underlying inflation trend evolves, all of which would hint at waiting a bit longer to collect more information. It should not be too hard to prevent the market from assuming that an October hike is the default because many investors already see the midterm elections in early November as an obstacle to an October hike.
That said, one person who could force Warsh to take the other side of the market’s nearly certain outcome, is former Fed governor Stephen Miran who earlier today tweeted the following:
I argued on CNBC this morning that:
1. The data have been consistent with not hiking rates. Core CPI came in at the lowest level since March 2021, and core PCE is about to be revised and brought closer in line with the less error-prone CPI levels. We are getting the evidence we need that the spring was consistent with a one-off energy shock, as core PCE moving averages slope down and come in line with a forecast to be back at target in the period after monetary policy lags, i.e. in about a year. We know from Trichet that hiking into an oil shock doesn’t lead to the best outcomes.
2. If you held in June and July and become more hawkish as the inflation data come down, it speaks to an incoherent reaction function. The market needs to believe there is an economic framework underlying monetary policy decisions and they are not being made randomly. Typically, a central bank becomes more dovish as inflation data and forecasts come down, not more hawkish. If the Fed hikes, when the dust settles, I think this will speak to a larger credibility problem as the reaction function will appear closer to randomness than to a mapping from inflation data to policy outcomes. This would entail the need to specify why hiking was consistent with declining inflation data in an economically coherent framework, which to date has not been done.
3. The oft-repeated argument that the Fed needs to hike “to control the long end” is problematic. The premise is invalid: with term premia and inflation expectations well behaved, the move higher in long yields has been a result of improved growth expectations, i.e. a good increase in yields rather than a bad increase in yields, and not one that needs to be fought (other than in the sense of smoothing volatility as Treasury is doing through buyback liquidity). Moreover, even if one views “controlling the long end” as a valid goal for monetary policy, hiking in this environment will be counterproductive as a) an increase in short-term funding costs is only going to be passed through and raise long yields given the shifting buyer base for Treasurys; b) history doesn’t really show that long yields come down with Fed hikes; and c) the incoherence of the reaction function will, when the dust settles and after initial reactions, lead to higher and not lower risk premia.
4. What, then, is the argument for hiking? Atmospherics. Market pricing and not wanting to cause additional volatility given market pricing. With well-anchored inflation expectations and the inflation data on the right path, credibility isn’t really at risk here.
The argument “inflation has been high for x months” is backward-looking. Given monetary policy lags, policy has to be set for Q4 of 2027 and Q1 of 2028. Setting policy based on what happened in 2023 or 2024 or even 2026 is the type of thing Milton Friedman’s “fool in the shower” would do.
In other words, don’t discount a hold, shocking as it may be to the market…
Market Reactions:
In its preview, the JPMorgan Market Intel team writes that while 25bp is priced (and 52bp for the year), the market is now pricing in just over three total hikes (76bp) by the end of 27 Q1. A number of client discussions center on (i) how much clarity to expect from Warsh on Weds; (ii) is the Market correct on thinking 75bps of hikes; (iii) would Warsh consider doing Sep / Oct / Dec hikes and/or Sep and 50bps in Oct or Dec given his perceived preference to front-load hikes; (iv) whether the path of least resistance is un-doing the “insurance” cuts done under Powel at the end of 2025.
The JPM Market Intel team thinking is (i) do not know but think a ‘less is more’ approach is most likely; (ii) 2x hikes seems more likely as we think a deal that materially reduces oil prices is likely to come before year-end; (iii) it is unclear if the FOMC would be supportive of an “accelerated” hiking schedule if it intends to only hike 50bp, so would think Sep / Dec is more likely than Sep / Oct if our 50bp of hiking assumption proves correct; (iv) we think Warsh’s view is that the economy has changed in that AI has evolved is may be on the precipice of delivering productivity gains that would create a disinflationary wave, so he is unlikely to subscribe to removing those insurance cuts as the solution to the current inflation problem.
Below is JPM’s forecast for how inflation and rates react to the FOMC…
Here is the full Fed Day scenario take from JPM rates strategist Jay Barry:
- NO HIKE: A very low probability event, as inaction risks institutional credibility, and would make the reaction at the July FOMC meeting appear pale in comparison. In this event, we think 1y1y OIS rates (as a representation of the market’s terminal Fed policy expectations) likely decline 25bp, which, using the observed sensitivity of Treasury yields to policy expectations in recent months, likely translates to a 20bp decline in 2-year yields.
- HIKE, NO GUIDANCE: The FOMC raises rates 25bp to address above-target inflation, but Warsh offers no forward guidance. This ambiguity could lead to a modest decline in front-end rates.
- HIKE, GUIDE TOWARD UNWINDING 2025 EASES: Given the Chair’s view that labor markets are at full employment, he indicates the 75bp of risk management cuts in 2025 were unnecessary, and the front end converges temporarily toward pricing in 75bp of total hikes.
- HIKE, R* IS HIGHER: The Chair admits policy is not restrictive and also admits that large-scale AI investment could drive productivity higher, resulting in higher trend growth and a higher neutral policy rate. Markets seem somewhat priced for this outcome, though 1y1y is back near its cycle highs and longer-dated forward expectations have eclipsed their 2023 highs, indicating markets believe in higher for longer, likely due to structural changes to the US economy (Figure 4). Given that perceptions of neutral tend to evolve slowly over time, we do not think the front end would move much, but there is room for longer-dated forwards to rise further.
- HIKE, CRUSH INFLATION: To borrow Bruce Kasman’s analogy, the Fed moves from a forgiving, New Testament Committee to a more vindictive, Old Testament central bank as it commits to quickly bringing inflation back to target, allowing markets to price in a higher terminal rate, but longer-dated forward OIS rates likely decline as markets interpret the Fed as being willing to sacrifice growth and labor markets to restore price stability.
Overall, JPM is not willing to attach probabilities to these outcomes, but the ‘No Hike’ and ‘Crush Inflation’ scenarios appear less likely than the other three outcomes in our mind, which could help the 2-year sector find firmer footing next week.
Next up is JPM” equity Scenario Analysis which sees lots of pain should Warsh shock the market and keep rates on hold, an outcome which the bank sees as smashing stocks.
- NO HIKE – If we see 10s / 30s moving higher as inflation expectations spike, this would be a negative for Equities. Look for SPX to fall 1.25% – 1.75%.
- 25BP HIKE / NO GUIDANCE – This appears to be the consensus view and this could also see the yield curve twist steeper with the moves in the back end of the curve contained and Equities would look to bond market pricing on rate hikes (Dec and Mar 2027) as the guide, and this creates a bid to stocks with a bias to Size. SPX +25bp to +75bp.
- 25BP HIKE / REMOVE 2025 EASES – Similar to the above scenario where Equities would operate as though this hiking cycle is 75bp of hikes, the question would be whether Warsh would consider going in Oct / Dec rather than Dec / Mar. The quicker move may be received more positively but this also assumes forward guidance from Warsh to explain. SPX +50bp to +1%.
- 25BP / HIGHER R-STAR – Without any guidance on where R-star is located, folks would look to economic theory which suggests that we may be ~100bp – 150bp below that level and hike cadence would matter as well as whether the Fed would consider doing 50bp at any 2026 meeting. Heightening bond vol would be a negative for stocks. SPX falls 25bp to -1%.
- 25BP / CRUSH INFLATION – Another tail risk scenario, where presumably Warsh would be indicating a Fed Funds materially higher than the other scenarios and Equities may react as though this is a repeat of the 2022 / 2023 hiking cycle which may end this bull market. SPX falls 1-2%.
Finally, below we present several views from around Goldman’s trading and strategy desks:
Rates, Short Macro Trading: Brian Bingham
We expect a unanimous vote for a hike on Wednesday: 2 or 3 implicit dissents via 3.625 year end dot, but no explicit dissents on the vote itself. We struggle to completely discount the risk that Warsh’s Jackson Hole speech was purely performative and he could in fact try to jam through a hold, but equally cannot fathom a world where he commits what would be construed as the policy error of all policy errors and holds rates. We have no position in the meeting, but for choice think the former is more likely given past precedent, and would rather rec from 23bps priced. Warsh’s characterization of how data influenced the decision to hike is the million dollar question. His blundered “in two words, ‘not much’” response during the July press conference resulted in the first leg of ct30’s ensuing meltdown; we expect a more calculated answer on Wednesday which acknowledges at least an implicit reaction function to subsequent data prints. We struggle to rationalize the argument against *continuing* a hiking cycle in advance of the midterms, but likewise see little asymmetry in paying the jump at 12.5 given our 3.875 dot forecast The 2027 dot is a close call between 3.875 and 3.625. More interesting will be the ’27 Core PCE forecast, and extent to which other submitters join Waller in incorporating methodological adjustments into their ex-ante forecasts; we don’t envy the communication task force having to explain the .04bp/month drag from portfolio mgmt. fee recalculation just as Warsh tries to minimize focus on the decimal place minutia.
Rates, Volex Trading: Mitchell Cornell
The rate vol market is in a state of stress heading into what is likely to be the first hike of the post 2023 cycle. Global energy markets, heightened focus on sovereign + corporate bond supply, and general stability of the labor market have combined to push duration levels to basically the cheaps of the last 20y. For the first bit of the selloff, the moves were orderly enough to not induce much higher vol. In the last week, with notable pain in Europe across the ECB, vol has moved sharply higher and payer skew has richened. In addition, as the front end has generally led the way, left hand side vol has richened versus right hand side vol. The Fed tomorrow will be key to give markets some understanding as to where the central bankers heads are at with respect to the extent of the hiking cycle. From an RV perspective, owing to the dynamics mentioned above: 30y tails have way underperformed the move higher in vols, and offer the best bang for the buck for owning convexity, especially on the payer side
Goldman Rates Strategy:
A hike with a more patient forward-looking signal in either the dots or in the press conference framing would likely reintroduce curve steepening risks. Conversely, a firmer indication of further hikes to come should sustain stability further out the curve and would keep the curve biased firmly flatter on higher inflation news. We continue to think that it will be hard for longer-term yields to fall sharply via lower risk premia alone under most scenarios, however, leaving lower yields up to better inflation news or a worsening cyclical view—both of which should result in a larger move lower in front-end/belly yields. We find that whether the first hike results in pronounced curve flattening has historically related to the nature of the cycle. In particular, we find that steeper front-ends at the time of the first hike tend to result in sharper flattening in the subsequent window, though the underlying dynamics can differ. The market priced meaningful hikes into periods of pronounced flattening following the first hike in 2004 and 2022, but where 2004 flattening came in the context a long-end led rally, 2022 reflected a further build in hike risks. Meanwhile, the more limited post-hike flattening in 1997 and 1999 coincided with shorter cycles from higher levels (both in market pricing and in what was ultimately delivered), suggesting a potential template for the current environment. While different starting points complicate an apples-to-apples comparison, and a decisively hawkish message next week would argue for additional flattening pressure, history suggests today’s backdrop is more consistent with limited flattening risk.
FX Delta One Trading: Carlie Ladda
The USD has followed Fed pricing and energy prices higher today with our franchise skewed towards USD buying with EUR a favorite expression. Positioning overall is light, with perhaps a small USD short skew. While we are light on risk at the moment as we await the meeting, we do think the bar to out hawk what is priced is quite high. On a dovish hike we prefer USD shorts vs JPY and AUD. USDJPY could retest last week’s lows, with potential to have a go at 152 again on a hawkish BOJ Thursday night. In that scenario, we could see AUD back on a 7200 handle as well. While energy prices and fiscal concerns continue to weigh on EUR, a broader USD sell off could see EUR back above its 200d ~1.1630 nonetheless.
FX Research: Lexi Kanter
We expect tomorrow’s FOMC decision to be a pivotal one for the USD direction as the Fed’s reaction function to uneven economic performance remains uncertain. As such, the dots (and communication) will be in focus as that will be an important indication of whether this would be a one and done hike. This is relevant for the direction of the USD, as recent USD weakness has been driven, in part, by a more uncertain reaction function and the perception that the FOMC has a high bar to tighten policy. Given current Fed market pricing and the recent move higher in real yields, a Fed that seems reluctant to move ahead of the curve by setting a high bar for further tightening would limit a lot of the positive USD impulse from a hike. The implied volatility gap around the September FOMC is currently ~47bps, above the one-year median implied gap. The FX Trading desk notes that the USD has rallied alongside Fed repricing and higher energy prices, with client flow skewed toward USD buying with EUR as the preferred short expression. Overall positioning remains light with a modest USD short skew, and the desk views the bar for a hawkish surprise as high. On a dovish hike outcome, the desk favors USD shorts against JPY and AUD.
Equities: Thank You Vickie Chang – Macro Research
With a roughly 90% chance of a hike priced, the market is viewing September as nearly a done deal. Our economists also expect a rate hike this week, although they do not think there is an overwhelming fundamental case to do it. There will be focus on whether the median dot shows 1 or 2 hikes, and on how the rate decision is messaged. The bar to a properly hawkish shock is quite high, given that the market is already pricing another hike this year and nearly four in total, so the main risk on the hawkish side is if the meeting opens up the prospect of a much faster series of hikes. Unusually, the larger market risk in the near term likely comes from the potential market reaction if the Fed holds. That kind of scenario could see long-end yields rise sharply, the curve steepen, the Dollar weaken, and gold rise. US growth pricing remains resilient, so beyond the FOMC meeting, the main potential tailwind to risk assets runs through potential rate relief—but that is likely to need to come through lower oil prices or more benign inflation data, rather than a more dovish Fed, given that a Fed that is perceived to be dovish for non-inflation-related reasons may boost term premium risk in bond markets. The risk that the Fed does not hike can be protected directly by receiving September meeting pricing given that the meeting is almost fully priced.
Equities: Cindy Lu and Robert Blank – Index Derivs Trading
The climate in equity markets has shifted pretty drastically in the past couple weeks – following the meaningful vol crush across both index and singles in August, tension has ramped up on the back of oil surging and yields rising. Hotter than expected economic data has also helped reignite inflation fears, with this month’s rate hike odds hitting 90% after last week’s CPI report. The most interesting thing in this tape is that index skew has seen a significant bid, but vols haven’t been reacting as dramatically. As the meeting’s outcome has become more certain, we actually don’t expect a large vol move this week (especially after they took a lot of event premium out of the surface last Friday). Flows wise, we’ve seen a more aggressive tilt towards hedging with both fixed strike puts and VIX calls. With SPX spot chopping around the 50-day moving average after a recent pullback from all-time highs, we’re now seeing the bulk of dealer long gamma to the topside. Locally, street gamma positioning is pretty flat, and we think this could free up potential realized moves to the downside. Having historically seen larger realized moves on FOMC/VIX expiry overlap days, the desk thinks that this Wednesday’s implied move is an own.
Credit: Usman Omer– Index Derivs Trading
Since last FOMC, as the markets have digested a strong slew of equity earnings, particularly in tech/ hyperscaler names (rerating equity multiples lower) and rates have come to the forefront, testing Warsh’s resolve in addressing inflation and global fiscal responsibility, several market participants have set hedges in macro credit instruments. Thematically, flows have felt decompressionary across the spectrum as a higher financing world weighs on HY corporates more than IG, and IG protection feels particularly offered ahead of the roll. Dispersion and CCC underperformance has also been topical — the equity tranche in HY45 has underperformed the rest of the capital structural notably (both driven by single names and correlation moves). FM/ Systematics have supplied ATM Vol, particularly 3m and in, to the market, taking implieds lower. We continue to think that in this world with ever increasing funding needs, credit will drift wider to a new zipcode. We like setting hedges in the super senior tranche in HY45 (effectively locking in ~4yr convexity at near all time tights in the instrument) and buying outright payers in CDX.
Commodities: Tony Kim – Co-Head of EMEA and Asia Commodities Trading
Locally it’s going to be a very choppy path… The CPI print obviously has increased the chances of the Fed hiking which generally is going to be a very for negative outcome for Gold, but a lot of that has been priced in over the week. Gold, while it has sold off, has certainly stayed in the recent range that it has been in. I think another one of the challenges that folks are not as focused on is that Hormuz continues to be a concern. That conflict has spread to the Red Sea. This could further complicate some of the issues associated with the logistics with rerouting energy flows. At the moment, the higher energy goes the more inflation concerns there are, the higher the yield curve goes and that’s going to be challenging for gold to overcome in the short term. The longer-term trends we think are still in place; Central Banks accumulation by the emerging markets, as well as fiscal challenges faced by the west. It doesn’t appear that any of those are going to be changing in the longer term. Ultimately, very hard to know when the inflection point is going to occur. At 4,000 price point we did see quite a bit of institutional and sovereign sponsorship. We think that prices eventually will take out the all-time highs, I don’t know whether that’s before year end or a next year phenomenon, but I think we need to get through what the Fed’s going to do with this data and how aggressive they signal on a forward basis, as well as getting some clarity on how the Hormuz situation is going to resolve before the market can really shake off those concerns and go to new all-time highs. From the trading side, front convexity looks cheap to optionalize delta positions into the Fed decision. Vol is carrying well, with neither callskew nor riskies reflect expensive upside convexity (riskies are below 3y avg, despite upside tail risks plus price support to the downside dampening vol). Gamma pockets on GLD could be a source of added volatility in the coming days, leading us to favour holding wingy calls into the Fed event. These carry reasonably well, and would see significant rally in the unlikely event the Fed decide not to hike.
Crude Dervis Trading: Edouard Mifsud
Prices are back to the highs following the shutdown of the Saudi East-West pipeline after an Iranian proxy attack, threatening several million barrels per day of exports. Prices were already supported by the physical markets. Eastern crude spot has been tightening since the start of August on stronger Asian buying and loss of Yanbu Saudi flow following the Houthis campaign on KSA exports. This opened arbitrage flow from the Atlantic basin, leading to a bid in dated brent and WTI and Brent futures spread. Vol and call skew stayed offered as dark transits through hormuz under US navy escorts kept creeping up., but this whole change after the petroline pipe was shut down Thursday. Short vol players stopped out, and the right tail abruptly repriced as the market fears further hits on Aramco assets. On the other hand, regional diplomacy is slowly progressing, with deep downside to prices if successful. Spec flow remains geared towards downside buying, and put skew quickly found a bid after Thursday.
