After CPI, Investment Banks "Tear Up Reports": No Rate Hike Faction "Surrenders" This Year, Hawks Bet on Three Hikes by January Next Year

After the release of the US August CPI, Wall Street investment banks quickly adjusted their forecasts for the Federal Reserve's interest rate policy. Although the overall CPI rose 3.4% year-on-year and 0.4% month-on-month, both in line with expectations, the core CPI increased 0.3% month-on-month, higher than the expected 0.2%, which became the direct trigger for several institutions to change their predictions.

The most notable change is that institutions that previously expected the Federal Reserve to remain on hold for the rest of the year have switched to betting on a rate hike in September; however, there is now clear disagreement on Wall Street over whether the hikes will continue after September.

TD Securities Most Hawkish: From "No Move All Year" to Three Rate Hikes Expected

TD Securities made the biggest shift.

Previously, the bank expected the Federal Reserve to keep rates unchanged for the rest of 2026; but after the August CPI release, strategists including Oscar Munoz and Gennadiy Goldberg adjusted their forecast to expect that the Fed will begin this rate hike cycle in September and raise rates three times in total.

Specifically, TD Securities forecasts:

• September: 25 basis point rate hike
• October: another 25 basis point rate hike
• January 2027: third 25 basis point rate hike

The strategists believe that the August CPI shows a lack of further progress on inflation, making it necessary for the Fed to start hiking rates in September.

As for post-September policy guidance, TD Securities expects the Federal Reserve may not provide explicit forward guidance, but the dot plot is likely to be hawkish.

This means that among the major investment banks, TD Securities holds the most aggressive view on the tightening cycle: not only including a September rate hike as a base case scenario, but also expecting the tightening to persist into early next year.

J.P. Morgan: Hikes in September and December, Pause in October

J.P. Morgan has also abandoned its earlier "wait and see" stance, now projecting 25 basis point hikes in both September and December.

The bank's Chief US Economist Michael Feroli stated that the rationale for a rate hike next week is simple: core PCE inflation has stayed above 3% every month this year, and recent progress toward the 2% target is very limited.

J.P. Morgan had previously predicted a December rate hike, but noted that if inflation data were too hot, the Fed might act as early as September. Now, with August core CPI exceeding expectations, a September hike is officially included in their forecasts.

However, J.P. Morgan does not believe the Fed will hike at consecutive meetings.

Feroli believes there is a reasonable case for pausing in October—to allow time to assess the economic impact of the hikes. Thus, the bank's base path is a hike in September, a pause in October, and another rate hike in December.

Meanwhile, J.P. Morgan believes that the current inflation still appears to be mainly driven by supply shocks, so the tightening cycle will not extend into 2027.

Mitsubishi UFJ: Pause After September Rate Hike, 55%-60% Probability of Another Hike in December

Mitsubishi UFJ has also completely abandoned its previous forecast of "no change through 2026".

Strategists George Goncalves and Agron Nicaj now expect a 25 basis point hike in September and a hold in October.

The reasons include Waller's hawkish remarks at Jackson Hole, robust employment data for August, and the latest CPI beating expectations.

However, Mitsubishi UFJ does acknowledge the possibility that this rate hike itself could turn out to be a "policy mistake". The strategists point out that with the market already highly anticipating a hike next week, it is now hard for the Fed to stay on hold.

They especially emphasize that since Waller has repeatedly highlighted "inflation is one of the options," doing nothing after the latest data could create issues in policy communication.

For the path forward, Mitsubishi UFJ expects a pause in October and believes the probability of another hike in December stands between 55% and 60%.

Therefore, compared to TD Securities, Mitsubishi UFJ's forecast is closer to a "hike-once-and-observe" approach before deciding on further moves.

In addition, the bank has raised its forecast for most US Treasury yields by 25 to 50 basis points, now expecting the 2-year yield to stand at 4.25%, the 10-year at 4.625%, and the 30-year at 5% by year-end.

Citi: Hike in September, Then Hold Until Rate Cuts Resume in June Next Year

Citi’s latest forecast is closer to a "one-off hike in September" scenario.

Citi economists Andrew Hollenhorst and Veronica Clark expect the Fed to raise rates by 25 basis points in September, then hold steady until June 2027.

They believe that August core inflation beating expectations, combined with renewed rises in energy prices, is "likely just enough to forge a consensus" supporting a hike at next week's meeting.

But Citi does not believe this means the Fed will resume a sustained tightening cycle. On the contrary, the bank expects that as inflation falls gradually, the Fed will begin cutting rates from June 2027 and deliver three cuts before the end of that year.

This means Citi's latest path is:

September hike → long hold → rate cuts start in June 2027.

Previously, Citi had expected that a weakening labor market would drive the Fed to cut rates this year; after August’s stronger-than-expected jobs data, the first cut forecast was pushed to 2027, and now, due to the CPI, Citi has also added a September rate hike expectation.

Significant Divergence Emerges Among Four Major Investment Banks

Following this round of revisions, there are now roughly four different main paths on Wall Street for the Federal Reserve's action over the coming months:

Therefore, the result of August’s CPI is more than just changing the conversation around “will there be a hike in September”—more importantly, Wall Street is now reevaluating the Fed's policy path for the coming months.

Currently, TD Securities stands as the most hawkish, expecting three consecutive hikes; J.P. Morgan expects two hikes within the year; Mitsubishi UFJ suggests a possible pause after September’s hike, while Citi forecasts only one hike in September before holding policy steady until next June.

The common thread is that a September rate hike is becoming the base case for more and more institutions; the real divergence now focuses on whether this hike is a “one-off correction” or the beginning of a new hiking cycle. The market has also clearly increased its bets on a rate hike next week, with the latest pricing at about 85%.