Scenario | Probability | Assessment |
Hawkish Hold | 5% | There is a tail risk that the Fed doesn’t deliver given the unique drivers of August’s hot CPI print. The dovish side of the FOMC can dismiss the inflation report and over-rule hawkish members. Also “hall of mirrors” problem can work in both directions (i.e., Fed doesn’t need to deliver what markets price-in).
|
Dovish Hike | 20% | If there are multiple dissents for a hold, the dots do not project 2 hikes for the balance of 2026 (and maintain multiple cuts to reach long-run dot), and/or Chair Warsh’s tone implies that hiking now is not indicative that a hiking cycle has started (one and done?), these would individually or collective be dovish.
|
Neutral Hike Base-Case | 55% | Statement: We expect language to remain largely the same, highlighting the balanced nature of the labor market following a strong August NFP report and the relative strength of economic growth, though it may include a reference to the “persistent stickiness” of inflation being above target to justify tightening by an incremental 25 bps. We expect Chair Warsh to try to aim for a 12/0 vote in favor of a hike. SEP Updates: Median SEP forecasts are expected to show elevated 2026 PCE inflation, mostly reflecting increased supply-side pressures, but will likely show little change in the growth and a minor tweak lower for the unemployment outlook. As a result, we expect an upward shift in the dot plot, with the median Fed Funds rate projection to signal two hikes in 2026 (compared to June SEP’s partial one hike projection). The key question is will the Fed dots continue to project an eventual return to neutral (~3%). We believe they will, and therefore, the dot path should show future rate cuts. We expect the long-run dot to nudge towards 3.125%, implying the Fed has largely maintained its outlook on the long-run neutral rate. Presser: At FOMC press conferences, Chair Warsh speaks for the full FOMC, so we do not expect a repeat of Jackson Hole. Rather, we expect a continuation of his previous press conferences where little forward guidance is offered. That said, he can state they are not on a set path and will remain data dependent.
|
Hawkish Hike | 20% | Raising rates at the meeting is hawkish and is enough to convey that the Fed is focused on fighting inflation. But to come across as even more hawkish, the dots need to project an unchanged 2027 vs 2026 median rate (suggesting the Fed’s on hold at higher levels for longer), or worse, they may suggest another hike in 2027. Lastly, based on recent experience, Chair Warsh’s tone can come across hawkish.
|
