Hiking is the wrong choice

Global Research Economic Alert 14 September 2026

FOMC – Hiking is the wrong choice • We continue to expect the FOMC to hold policy rates on 16 September • An unneeded hike will have a reputational impact if data suggest inflation pressures are diminishing • An on-hold decision may hurt the USD and the long end of the curve; a hike would likely stabilise both • The statement and SEP may change little; Warsh looks set to face a difficult press conference

Waiting on Warsh The correct Fed policy decision in our view is straightforward – stay on hold until the John Davies noise from tariffs and data revisions dissipates. It is very likely that core inflation is overestimated. Tariffs are having a significant but uncertain upward effect on core PCE US Rates Strategist inflation. The Commerce Department’s comprehensive GDP revisions are likely to Standard Chartered Bank lower recent inflation estimates slightly. Core inflation is not moving decisively in either direction. From a risk-management perspective, the FOMC should allow data to settle Steve Englander before determining whether a hike is necessary. It could open the door to a 50bps hike if subsequent data supports the hawkish case. By contrast, reversing a premature hike Co-Head of FX Research, ex-China, and would damage credibility and be seen as a very unsteady hand on the tiller. Head, North America Macro Strategy Standard Chartered Bank NY Branch Fed funds futures are pricing in an 88% probability that the FOMC will hike by 25bps and now prices 74bps of hikes by March (Figure1). The market has priced 35bps of added hikes by March off Warsh’s Jackson Hole comment “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed” and ignored Warsh’s emphasis on underlying inflation – “We want to gauge whether underlying inflation is rising, falling, or stuck in place.” The data may look very different in a couple of months .

Even if a hold is justified, we see a clear risk that an on-hold decision hurts the long end of the UST curve and the USD. It is a big rates repricing to absorb and could reignite doubts around Chair Warsh’s inflation-fighting rhetoric that emerged after the 29 July FOMC meeting. This episode of USD weakness does not affect our medium- term view of USD strength, but the rates moves could lead to a sharp, albeit temporary downward USD move. The short end might not see much selling pressure, as more than three 25bps hikes are already priced in over the next 12 months, setting a high bar for the dot plot and Warsh’s press conference to out-hawk the market. If the Fed hikes as now priced, there could be an added boost to Warsh’s credibility, stabilising long-end yields and the USD.

Figure 1: How far is the Fed prepared to fight the market? Market implied tightening, bps

40 20 0 First FOMC meeting -20 -40 -60 Jan-26 Feb-26 Mar-26 Apr-26 May-26 Jun-26 Jul-26 Aug-26 Sep-26 Source: Bloomberg, Standard Chartered Research

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Issuer of Report: Standard Chartered Bank Important disclosures and analyst certifications can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2026

We also take seriously another of Warsh’s Jackson Hole comments: “If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments…more likely to be caught unprepared for a turn of events…and more likely to commit errors in policymaking.” The sharp rise in hiking expectations in recent days puts pressure on Warsh to validate hawkish market pricing. If Warsh comes to associate credibility with matching market pricing, there is a risk that market pricing will increasingly influence policy decisions.

Inflation outlook is far more two-sided than priced Supercore inflation moving steadily Warsh has been pretty dismissive of the Powell Fed’s reliance on imperfect data. downward However, we see value in supercore measures which largely abstract from tariffs and are closer to capturing underlying inflation from domestic sources. Our supercore measure of CPI…