The market says hike. The White House says cut. Next Wednesday we find out.
The Signal
Heading into the September 16 FOMC decision, swaps and futures markets imply roughly 60% odds that the Fed lifts its target range to 3.75%–4%. That puts the market and the White House on opposite sides of the same question. President Trump has again pressed policymakers publicly to cut, arguing that elevated rates leave the United States at a competitive disadvantage and saying he will not allow that to continue.
The Fed goes into this decision with less public goodwill than usual. A recent Gallup survey found just 33% of U.S. adults rated the Fed’s board as doing an excellent or good job, while 27% called its performance poor. A central bank operating under that much political and public scrutiny has fewer quiet options than one working out of the spotlight.
We wrote last week that the data, not any single official’s comments, would set the tone into this meeting. That remains our view, and Friday’s CPI report is the number that matters most, currently expected at 3.40%. What has changed is the balance of probabilities.
A week ago, we told clients we did not expect a hike at this meeting. Today we would not be surprised by one. That is a meaningful change in our thinking, and we would rather flag it early than explain it afterward.
What’s Driving It
The market and the White House are pointed in opposite directions.
Investors are pricing a better-than-even chance of a hike to counter inflation at the same moment the President is publicly urging cuts. That is an unusual setup, and it means the September 16 decision will be read as much for what it signals about the Fed’s independence as for the rate itself. Whatever the committee decides, we expect the post-meeting commentary to matter more than it typically does.
Scenario one: a hike without the chair’s support.
This is the outcome we would least like to see. The Federal Open Market Committee has never voted against its chair on a rate decision in the modern era, and it has not done so on any substantive policy question since Marriner Eccles held the chairmanship in 1939. A break of that kind would register as a crisis of leadership. Markets and the public would perceive an unpredictable contest for control of the institution, and we would expect rate and bond-yield volatility to rise accordingly.
Scenario two: policymakers stay on hold.
Rates remain at 3.5%–3.75%, in our view with dissents. The difficulty with this path is not the level, it is the interpretation. With the November 3 midterm elections approaching, a hold would invite the conclusion that politics drove the decision, and the President’s public comments would certainly be cited as evidence. We do not think appeasement is a strategy that works with this administration, and markets have historically punished policymakers when investors concluded they were going too easy on inflation.
Scenario three: Warsh supports the hike.
As of this writing, swaps and futures imply roughly 60% odds the Fed moves to 3.75%–4% on September 16. Chair Warsh’s Jackson Hole address last month was resoundingly hawkish and, in our reading, unusually clear: policymakers need confidence that underlying inflation is moving to the Fed’s objective “clearly and at sufficient speed,” and absent that, the committee still has work to do. Following through will take backbone. We expect the fallout from the White House to be brutal if the Fed does lift rates.
Warsh has talked tough without tipping his hand.
The President appointed Warsh earlier this year after repeatedly criticizing his predecessor, Jerome Powell, for holding rates too high. Since taking the job, the new chief has been firm on inflation while pointedly declining to signal a specific move in the coming months. Jackson Hole was the closest he has come: he described the labor market as stable and made clear his focus is on inflation. That leaves Friday’s CPI print as the most important input the committee will have, and the most important one we will have for reading the committee.
Away from Washington: New York’s MTA returns with “mansion” tax bonds.
The Metropolitan Transportation Authority is bringing $785 million of debt this week secured by a levy on high-end real estate sales. It is the second such deal from the MTA, backed by revenue from sales of residential and non-residential properties of at least $2 million. We expect the credit trajectory here to continue improving.
Our Take – Sloppy Markets
A week ago, we wrote that we did not expect a hike on September 16. We are revising that. With the market near 60% and the chair’s own remarks pointing in one direction, the more useful question for clients is no longer whether the Fed moves, but how the decision gets made and how it is received.
Each of the three scenarios carries its own volatility. A hike over the chair’s objection would be the most disruptive, because it would put the institution’s cohesion in question rather than just its policy stance. A hold would raise questions about independence heading into the midterms. A hike with Warsh’s support would be the cleanest outcome for the Fed’s credibility and, on the inflation data, but it would still meet real political resistance.
Friday’s CPI is the swing factor. Consensus sits at 3.40%. A hotter print makes a hike considerably more likely and the committee’s job politically harder. A softer print gives the doves an argument and, in our view, likely produces a hold with dissents.
Our positioning has not changed, but our expectations have. We remain buyers at current levels. Elevated yields are the reason we have been constructive, and a hike would extend that thesis rather than undo it. What we would avoid is positioning built on the assumption of a quiet meeting. We do not expect one.
Recommendations
Do not position for a quiet Fed meeting
Markets imply roughly 60% odds of a hike on September 16, and all three plausible outcomes carry volatility. We would rather own paper we are comfortable holding through the decision regarding credit rating and insurance.
Watch Friday’s CPI as the swing factor
The print is expected at 3.40%, and it will do more to shape the September 16 decision than anything else on the calendar. We are reading it alongside you and are prepared to act on your behalf.
Use volatility rather than wait it out
Our view here has been consistent: swings in either direction are opportunities for disciplined buyers, not reasons to sit on the sidelines. If a hike materializes, we would expect to be adding rather than stepping back. Reach out if you’d like to discuss what any of these outcomes would mean in the context of your portfolio.
Let’s Talk
If you would like to discuss any of the above in the context of your portfolio, reach out. This market environment rewards preparation — and that is exactly what we are here to help with.
