"New Federal Reserve News Agency": The Federal Reserve is set to raise interest rates next week, but a single rate hike won't solve the problem

On September 11, according to Wallstreet CN, the U.S. August core CPI year-over-year growth was 2.4%, hitting the lowest level in five and a half years, while the month-over-month growth was 0.3%, exceeding expectations and marking the largest increase in four months.

Subsequently, "the new Fed spokesman" Nick Timiraos wrote that investors have basically assumed that the Fed will implement its first rate hike in three years next week. The tougher question is what will happen afterwards.

Since almost no one inside the Fed believes that a single 25 basis point rate hike is enough to suppress inflation, if a rate hike is decided next week, it signals that the current interest rate level is already off track—and correcting it will not be achieved in one step.

After the U.S. CPI data, investors now expect that by June next year, the Fed will have raised rates at least three times, higher than the previous expectation of two. The probability of a Fed rate hike in September has also surged to 90%.

Meanwhile, the Fed is facing real political pressure. President Trump previously made clear his opposition to a rate hike, expressing hope that the new Chair, Walsh, would bring lower interest rates. Vice President Vance stated last week that he welcomed the Fed's cooperation on rates. Treasury Secretary Bessent also argued that recent inflation stems from supply shocks and that the Fed should not tighten policy at this time.

Nick Timiraos pointed out that since the 1990s, when the Fed set the federal funds rate as the core tool for managing borrowing costs, there has been only one precedent of a "single rate hike and pause"—in 1997.

Richard Clarida, former Fed Vice Chair and now at Pimco, stated clearly:

If there is a rate hike next week, it definitely won't be 'one and done'; further action will follow.

Walsh's own statements have also corroborated this for the market. In July, he said he did not believe the Fed excels at "fine-tuning" the economy. Analysts point out that a Chairman who is skeptical of fine-tuning is unlikely to declare the job done after a 25 basis point rate hike.

Fed Governor Waller also made this logic clear last week: raising rates by 25 basis points in a single meeting is not enough to bring inflation back to the 2% target.

Piper Sandler strategist and former senior Fed advisor Kurt Lewis said:

Once you decide to tighten policy, you have to drive rates high enough for the restrictive stance to have a meaningful impact.

Previously, the market was divided over whether the September meeting would see a rate hike, but the inflation data released on Friday broke this balance.

Officials had predicted in June that inflation would subside in the latter half of the year as tariff effects gradually dissipate, and the June and July data briefly confirmed this view. However, August data reversed the trend. Key indicators measuring core consumer prices exceeded expectations, combined with better employment data and tensions in the Persian Gulf pushing oil prices higher again.

Lewis stated bluntly that the August inflation data "became the final straw that broke the camel's back," elevating the significance of the September meeting from a "one-time decision" to the starting point of a "policy path."

San Francisco Fed President Mary Daly recently characterized the Fed's current choice as a decision between two economic scenarios:

• First, the shocks from the past two years gradually dissipate, and current policy settings are sufficient to bring inflation down;
• Second, the shocks accumulate, inflation continues to spread, and the Fed needs a much larger adjustment than 25 basis points.

She said that Scenario One remained her baseline at the beginning of August, but the probabilities of the two scenarios have gradually converged since then.

The article points out that Walsh’s keynote speech at last month’s Jackson Hole symposium laid the argumentative foundation for the judgment that "interest rates are at the wrong level."

Walsh had previously said there was almost no evidence that current borrowing conditions were restraining economic activity, and that improvements in inflation data for June and July did not convince him that the underlying trend had improved. However, this logic naturally prompted the market to ask: how high must rates go?

The Fed Chair has historically guided market expectations by explaining that the policy purpose of a rate hike is "recalibration," a "precautionary operation," or a "risk management adjustment," without the need to make explicit promises about the future path.

But Walsh has long been averse to forward guidance, believing it binds the central bank’s policy flexibility.

BNY Investments Chief Economist and former head of the Fed’s monetary affairs division Vincent Reinhart warned that the lack of guidance would allow a single rate hike to be infinitely magnified by the market. He said:

If you don’t lay the groundwork in advance, policy moves face the risk of being excessively speculated on. The market naturally tends to interpret the first rate hike as the start of a series of moves, and without guidance, you simply cannot suppress this expectation.

In addition, Nick Timiraos believes that Fed officials advocating early action have, from another perspective, reinforced the rate hike logic.

St. Louis Fed President Alberto Musalem said in a speech last month, "Earlier, more gradual, and smaller rate hikes are preferable to potentially later, more abrupt, and larger adjustments." He already supported a rate hike at the July meeting.

This camp’s arguments are based not just on the past three months of data, but more on future risks:

• The Iran war driving up diesel prices, with the effects not yet fully transmitted through shipping networks;
• A new round of tariffs is imminent;
• The large-scale expansion of artificial intelligence infrastructure is putting extra pressure on the electricity grid and tech supply chains;
• High equity prices are continuously supporting consumer demand.

Musalem stated clearly that the probability of inflation remaining significantly above the Fed target over the next 12 to 18 months now outweighs the probability of inflation returning to the 2% target.

The Fed still holds a tool to shape expectations: the quarterly publication of officials’ economic forecasts, which include anonymous predictions about the future rate path.

At the June meeting, Walsh refused to participate in submitting dot plot forecasts. Point72 Asset Management Chief Economist Dean Maki predicts that this set of forecasts "will send an unusually strong signal."

Maki said that if Walsh makes clear that this rate hike is meant to "recoup part of last year's rate cuts," investors will interpret it as at most two or three more rate hikes. But he also noted:

This would contradict his consistent opposition to the Fed providing such forward guidance.