Standard Chartered believes that core inflation pressures may be overstated, and rate hikes remain the "wrong policy choice": Tariffs have raised PCE by about 0.7 percentage points, but the impact is expected to fade; super core CPI has returned to normal ranges, and consumer-side pressures are limited. Only 3 voting members supported a rate hike in July, and current data is insufficient to sway more members. A more reasonable approach is to wait for tariff impacts and data revisions to dissipate before judging the inflation trend.

Written by: Li Jia, Wall Street Insights

The Federal Reserve's September meeting is nearing, and the market is holding its breath for policy direction.

On September 14, Standard Chartered released a report clearly stating that the Federal Reserve will keep interest rates unchanged at the FOMC meeting on September 15-16 (the interest rate decision will be announced early Thursday morning, Beijing time). In the bank's view, a rate hike at this time is still the "wrong policy choice"; a more reasonable approach would be to wait for tariff shocks and recent data revisions to dissipate before judging if inflation is forming a trend.

The issue is that the market has already made quite an aggressive bet. Current pricing in federal funds futures shows an 88% probability of a 25 basis point rate hike in September, and it is expected to have accumulated rate hikes of about 74 basis points by March next year. This wave of heightened expectations has largely been driven by Wash's speech at Jackson Hole.

However, the report points out that the market may have only captured the hawkish parts of Wash's speech. On one hand, Wash emphasized the importance of getting inflation back to target, while on the other, he indicated that policymakers must assess whether core inflation is rising, falling, or stagnating, rather than making judgments based on single data.

Wash also warned that if the market relies on guidance from the Federal Reserve, and the Fed in turn relies on market prices, policymakers may overlook new economic changes, increasing the risk of policy missteps.

According to Standard Chartered, this risk is increasingly being amplified. The higher the expectations for rate hikes, the stronger the market pricing's reverse constraint on policy becomes, making it easier for the Federal Reserve to be influenced by existing expectations, thus forming a feedback loop of "market expectations driving policy, and policy further reinforcing market expectations."

Therefore, if the Fed is ultimately to remain on hold in September, the real focus will be on how Wash handles the already high expectations for rate hikes: he must explain why a hike is unnecessary at this time, and also demonstrate that the Federal Reserve will not be swayed by market pricing.

The voting logic also does not support a rate hike in September

The voting structure is also an important basis for Standard Chartered's judgment. In July’s FOMC, 3 members already supported a rate hike; for a rate hike to actually happen in September, at least 4 members who initially leaned toward keeping rates unchanged would need to switch their positions to reach the 7-vote threshold.

Standard Chartered believes that Wash's most likely strategy is to avoid becoming part of the minority but will not actively push for a rate hike. If another 4 members switch, he might join the rate-hike camp; if only 3 switch, Wash might cast a vote in favor of a hike to avoid a 6-6 tie; if only 2 switch, he still has room to support keeping rates unchanged.

The key is whether the data since the July meeting is enough to persuade at least 3 members of the "hold" faction to change their stance. Standard Chartered believes that the current data is insufficient to meet this condition.

The real test will be at Wash's press conference

The report anticipates that there will not be major adjustments in the FOMC statement. Regarding the SEP, the dot plot may not shift significantly hawkish, but compared to June, the space for rate cuts may narrow further, and the weighted average interest rate may rise slightly.

If the Fed ultimately remains on hold, Wash will face a greater test at the press conference: he must explain why a hike is unnecessary right now and clarify how the Federal Reserve views the high rate hike expectations that have already formed in the market.

The market will especially likely question whether a rate hike possibility still exists for the October meeting. Wash will probably emphasize "decisions based on data at each meeting," but if there are no clearer policy trigger conditions, doubts about his stance may persist in the market.

Thus, the impact of the September FOMC depends not only on the interest rate decision itself, but also on Wash's effectiveness in guiding future expectations. For the dollar and the long end of U.S. Treasuries, the key variable post-meeting will be how the market reprices the future path of interest rates.