US Fed Policy Preview: Is the FOMC Set to Break a Three-Year Streak? Why Kevin Warsh May Hike Rates Today

The US Federal Reserve will declare their bi-monthly monetary policy outcomes in the late hours of September 16. The market is predicting a 25 basis point hike from Fed chair Kevin Warsh and his team. The case of a rate hike is justifiable after Kevin Warsh's Jackson Hole speech, where he painted a muddy picture for the financial economy. His emphasis on trends instead of individual data points has made experts confident that Warsh had made up his mind for beginning the rate hike cycle. The elephant in the room is the stubborn rise of longer-dated treasury yields, which has kept FOMC on the edge.

One thing is clear though, Warsh definitely has the blessing of US President Donald Trump who recently stated, "he'll do what he has to do." A stark contrast to Trump's dislike for former Fed chair Jerome Powell.

The Justification Of Rate Hike On September 16:

According to economists at ING, after sounding hawkish in June and then backtracking somewhat at the July FOMC press conference, Chair Warsh was under pressure to clarify the Federal Reserve's reaction function under his leadership at Jackson Hole. He emphasised a focus on inflation, which has been above target for five and a half years, and a sense that financial conditions aren't tight in an environment of full employment.

"This suggested we needed to change the way we thought about the September Fed decision. Previously, it was that the Fed would hold unless the data justified a hike. That changed to the Fed hiking, unless the data justified a pause," said the economists note.

What we know so far? August's jobs report came hotter than expected in Bloomberg's survey of economists and headline inflation remained above FOMC target at 3.4% with core CPI rising 0.29% on month-on-month basis.

Economists at ING cited that in an environment where business surveys have hinted at a re-acceleration in economic activity over the summer and where the disruption to shipping out of the Middle East has pushed oil prices above $100/bbl, Chair Warsh's emphasis on trends rather than individual data points suggests he has made his mind up to propose a hike. No-one on the FOMC is openly hostile and Treasury Secretary Scott Bessent is likely in favour as he nervously watches longer-dated Treasury yields climb.

Since the Federal Reserve's last forecast update, ING's economists note added, "we saw a weaker than expected 2Q GDP report, a softer trend in job creation, notwithstanding the August surprise, while inflation has shown some encouraging signs of decelerating, even if the year-on-year rate remains above 2%. We continue to argue that weak wage growth, tariff refunds and a stagnant housing market, which will slow shelter inflation, will all contribute towards a convergence on the 2% inflation target next year."

Accordingly, they said, "A 25bp hike could or should help. That said, whether the Fed hikes or not, the 10yr yield is liable to test 5%. It's up there mostly on account of higher real yields in fact. There is not much the Fed can do about that, to the extent that it reflects productivity growth expectations (the good), wider issuance pressure (the bad), or the evolution of the Iran war's effect on oil prices (the ugly)."

Should Fed Wait On Hikes?

Although expecting a rate hike, experts at Erste Group Research believes that Fed still has the option to continue waiting and hoping that, with the disappearance of one-time effects, inflation will fall to the target level.

In fact, they argue that the pass-through of US tariffs starting in the second half of 2025 and the rise
in energy prices beginning this spring have pushed inflation higher. The effects of both price spikes will subside (tariffs) or even dampen inflation (energy prices) once the higher base of comparison takes effect - that is, one year after each price spike.

Further, they added. "It is therefore likely that US inflation will decline over the medium term. The question, however, is whether that will be enough to bring inflation down to the Fed's target. For a variety of reasons, we do not believe this will be the case."

They also said, "We expect an interest rate hike of 25 basis points (bp). The market is pricing in a probability of over 60% for this outcome. We agree that the outcome of the meeting is not yet certain. From our perspective, however, it is becoming increasingly difficult to justify the FOMC's wait-and-see stance."

US Fed Rates Latest

At present, the Fed rates are 3.50% to 3.75%. If Fed hikes rate, it will be the first hike since 2023.

US headline inflation held at 3.4% year-on-year in August, while core inflation was at 2.4%. Meanwhile, diesel prices have risen to $6 a gallon, adding further pressure to the inflation outlook as an end to the conflict appears increasingly distant. In his Jackson Hole speech last month, Chair Warsh said that if the Fed was not confident that underlying inflation was declining, it would have "work to do". Policymakers will also release updated economic projections. In June, the so-called dot plot showed that nine officials expected at least one rate hike this year, while six anticipated at least two. Chair Warsh did not submit a forecast at the time, as per Trading Economics.

The Fed policy outcomes will be announced at 18:00 GMT or 11:30 PM Indian Standard Time (IST) on September 16.

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