Tonight the Fed rate hike is almost certain; the market is closely watching Waller's remarks: will a signal of continued rate hikes be released?

Tonight, the first Fed rate hike since 2023 is almost a foregone conclusion, but what really keeps the market on edge is what Walsh will say—or not say—after the hike.

Currently, the market is pricing over a 90% probability that the Fed will raise rates by 25 basis points this week, lifting the target range from 3.5%-3.75% to 3.75%-4.00%. This expectation comes from Walsh's hawkish remarks at the Jackson Hole Symposium, followed by August non-farm payrolls far exceeding expectations, and a higher-than-expected month-on-month rise in August core CPI. The hike itself is no longer in doubt; the real market focus is: how many more hikes the dot plot will show for this year and whether Walsh will provide a clear policy path signal during the press conference.

Citigroup and Goldman Sachs are highly aligned in their views: this hike will be a "dovish hike," and the Fed is unlikely to actively signal continued hikes, with the median dot in the dot plot only showing one more hike for the year. However, Standard Chartered takes an entirely opposite stance—arguing that a September hike itself is a policy mistake and that the correct choice is to wait for tariff shocks to fade before making a decision.

Meanwhile, according to strategy analysis by JPMorgan and Goldman Sachs, if the Fed hikes as scheduled but refuses to provide clear forward guidance, the yield curve may steepen and provide mild support for equities; if Walsh unexpectedly sends a strong hawkish signal of continuous hikes, it would trigger a surge in interest rate volatility. Conversely, if the Fed unexpectedly announces a pause, it would seriously damage policy credibility, potentially trigger a stock market selloff, and cause long-term US Treasury yields to soar on inflation concerns.

Notably, this Fed rate hike could also spark political friction. Trump recently reiterated that the US should have the world's lowest borrowing costs, and this hike could subject Walsh to fresh criticism from the White House.

Rate Hike Logic: Walsh "Cornered"

Walsh’s speech at the end-August Jackson Hole Symposium effectively put him in a dilemma. He made it clear that the 12-month PCE inflation rate stands at 3.7%, and the six-month annualized rate is as high as 4.1%—both far above target—with over half of PCE components still rising at rates above 3%. He warned the Fed "still has work to do" unless inflation makes clear progress toward the 2% target.

Two weeks later, core CPI in August rose 0.3% month-on-month, higher than the 0.2% expected, further solidifying rate hike expectations. According to the latest Reuters survey, 85% of 101 economists expect the Fed to hike, and money markets are pricing about a 90% chance of a hike.

Nevertheless, a rate hike is not set in stone. In remarks before the September FOMC "blackout" period, Fed Governor Waller took a clearly dovish stance, saying that if August inflation data shows continued progress, he would favor holding rates steady—but added that if inflation runs hot, a hike would be considered. Meanwhile, Oxford Economics believes three consecutive groups of mild inflation data justify no move, and dovish views should not be ignored.

Citigroup and Goldman Sachs: Passive Hike and "Calibration" Framing

As Wallstreet News reports, Goldman Sachs expects the Fed to hike 25 basis points at the September FOMC not due to robust economic logic, but mainly under "pressure" from market pricing. The Fed’s statement will make only minimal necessary adjustments and avoid providing any forward guidance on the future path—a "signal-less" hike.

Goldman explicitly states there is not enough economic basis for this federal funds hike. Goldman’s core view is that the entire overshoot of inflation versus the 2% target can be attributed to one-off factors that are expected to fade, including tariff effects, energy and Iran-related shocks, and software/peripheral price effects. Goldman notes core PCE inflation improved to an annualized rate of about 2.5% (including expected methodological revisions) from June to August, an early sign of these one-off shocks fading.

On the breadth of inflation, Goldman also disagrees with prevailing concerns. While more categories have recently seen prices rise at over 3% annualized, Goldman points out that stripping out tariff effects, the breadth is comparable to historical periods with 2% inflation. In addition, Goldman’s "bottleneck tracking indicator" shows that industry-level capacity constraints are now even slightly less than pre-pandemic, suggesting the economy is not overheating—which is usually the core reason for rate hikes.

Goldman argues that after the August CPI data, markets priced a hike probability close to 90%, and to avoid market turmoil from standing pat, the Fed is compelled to hike—this is a rate hike "forced by market pricing", not a proactive, fundamentals-driven tightening move.

Citigroup's baseline forecast sees the Fed framing this hike as a "calibration"—with no implication that further hikes are inevitable. The accompanying guidance will no longer point to further policy rate increases. Walsh will most likely downplay this hike as a "minor adjustment" or "fine-tuning" and signal to markets that if inflation shows signs of returning towards target, no further hikes may be needed.

Dot Plot: One More or Two More—Unresolved Suspense

In the absence of clear statement guidance, the dot plot and Walsh’s press conference are the market’s biggest suspense points.

According to "the New Fed News Agency" and Wall Street Journal reporter Timiraos, only once in Fed history—in 1997—did a "hike-then-stop" operation occur; history shows hikes usually come in sequences. Former Fed Vice Chair Richard Clarida also said: “If there’s a hike next week, there will surely be more.” Currently, CME FedWatch data show the market is pricing in nearly four rate hikes by October 2027.

Goldman expects the dot plot to show a narrow 10-to-8 majority for just one more hike in 2026 (with Waller and possibly other members at zero hikes for the year). Goldman's rationale: some members are conflicted over this hike, and some do not want to exacerbate market expectations for additional hikes.

But Goldman also clearly highlights a tail risk: if more members view this week’s hike as a normal response to higher oil prices and AI demand—and as the start of a series—then the risk of a majority in favor of two hikes cannot be ignored.

In terms of dissent votes, Goldman expects Waller to dissent, because the annualized rate of core PCE inflation (with expected methodological revisions) has fallen to about 2.5% over the past three months—below his previously stated immobility threshold of 2.8%.

The Summary of Economic Projections (SEP), released in tandem with the rates decision, will be another focal point. On inflation forecasts, both Citi and Goldman expect the core PCE forecast to be revised downward due to methodological changes. Goldman expects the median prediction for core PCE inflation in 2026 to drop slightly from 3.3% in June to 3.2%, providing data support for halting hikes. The medians for 2027 and 2028 each show one rate cut, remaining at 3.625% and 3.375%, respectively.

Goldman also notes that the neutral rate estimate may be nudged upward at this meeting and rise slowly over the next year to about 3.25%-3.5%—partly because the economy has held up well at higher rates, leading some members to think the current rate is near neutral, and because AI investment demand could push up the equilibrium rate.

Walsh Press Conference: The Market’s Biggest Uncertainty

Besides the dot plot, Walsh’s press conference will be the biggest source of uncertainty tonight. Notably, Walsh is expected to again refuse to submit his own forecasts, continuing his habitual aversion to forward guidance.

Regarding the press conference, Citi warns that if Walsh only emphasizes "more work to do" without providing near-term rate guidance, this could be seen as a dangerous signal by the market. In this hawkish risk scenario, markets might price in hikes at both the October and December FOMC meetings, even extending hike risk out to 2027.

Goldman’s take on this scenario is more specific: the FOMC might want to guide the market to lower confidence in an October hike (currently nearly 50%) but not say so explicitly in the statement. Instead, Walsh may indicate in the press conference that before further action, the FOMC will "carefully assess" upcoming data, expressing a desire to see several upcoming inflation reports or observe underlying inflation trends—any such remarks would signal the committee wants to gather more data before acting.

Goldman adds that many investors already see the early November midterm elections as a political barrier to an October hike, making it relatively easy to prevent the market from treating an October hike as the "default baseline."

After the July meeting, Walsh was criticized by the market for not clearly explaining the decision to stand pat, which triggered a jump in long-term US Treasury yields. If he is again vague this time, market reactions could be even more dramatic.

Standard Chartered: A Rate Hike Is a Policy Mistake

Standard Chartered’s report issued September 14 takes the opposite view, explicitly stating the Fed should hold rates steady at this meeting, and that a hike now would be a "wrong policy choice."

Standard Chartered’s main argument: current core inflation may be overestimated. Its tracked "ultra-core" CPI has recently dropped significantly, back to normal 2010s ranges. Chained core CPI has recently diverged from core PCE, with chained CPI better reflecting actual consumer spending. Its recent trend merits close attention from policymakers. Furthermore, several internal Fed analyses suggest tariffs may contribute around 0.7 percentage points to PCE inflation. As tariff revenues peak in Q4 2025, this inflation effect could fade over the coming months.

Standard Chartered also points out that market pricing constrains policy in reverse, creating a feedback risk that "market expectations drive policy, and policy then reinforces market expectations." Walsh himself warned in his Jackson Hole speech that if markets rely on Fed guidance, and the Fed in turn relies on market prices, new economic developments could be missed and policy errors become more likely.

On the voting logic, Standard Chartered notes that three members supported a hike at the July FOMC. To achieve a rate hike in September, at least four previously neutral members would need to flip, reaching a threshold of seven votes. Standard Chartered believes current data is insufficient for this to occur.

Asset Pricing and Volatility: How Will Markets Respond?

Goldman’s rate volatility team wrote on September 15 that US implied rate volatility has remained restrained even with yields rising, but last week’s sell-off came with a notable volatility uptick. After controlling for broader macro fundamentals, current US implied rate volatility has risen from the lower end of fair value to near the midpoint, indicating the market is vulnerable to broader dispersion of policy path scenarios.

Goldman believes if the Fed hikes 25 basis points as expected, the path of volatility will depend mainly on forward signals from the SEP and press conference. If the dot plot shows one to two hikes and stresses data dependence, it won't fully dispel forward uncertainty, but should allow volatility to retreat and the curve to flatten at the tail.

Goldman's historical research shows that when the market is pricing a 75%-90% chance of a hike, a mildly hawkish (as-expected) decision usually brings above-average volatility sell returns, supporting the view that in a "hike as expected + mild message" scenario, volatility will retreat somewhat.

Conversely, if the Fed unexpectedly stands pat, Goldman thinks this will trigger a bigger jolt to the whole volatility surface—not only failing to lower rate hike expectations, but, while sustaining inflation and term premium worries, further magnifying front-end uncertainty. Last week's ECB meeting offers a reference: a tough hawkish signal combined with a hike led to a swift jump in short-term volatility that then spread across the surface.

In its base case, Goldman expects that if subsequent inflation data proves mild enough, the Fed will pause after this week’s meeting, and volatility will retreat as hike risk fades.

JPMorgan's scenario analysis suggests if the Fed hikes without forward guidance (baseline), the S&P 500 could rise 25–75 basis points; if Walsh unexpectedly sends a hard anti-inflation signal, equities could fall 1%-2%.

The most dangerous tail risk is an "unexpected hold," which would not only trigger a front-end dovish repricing of rates, but also send long yields surging due to inflation fears and credibility loss, steepening the curve sharply and triggering a stock market selloff.